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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Week ended October 4, 2024: soft landing in sight

“Demand remains subdued, as companies showed an unwillingness to invest in capital and inventory due to federal monetary policy — which the U.S. Federal Reserve addressed by the time of this report — and election uncertainty.”

September 2024 Manufacturing ISM® Report On Business®

 

The sentiment and drivers last week in global financial markets were not dis-similar to those from the week before – ongoing geopolitical risk continued to dominate the news, and US economic data continued to suggest that a soft landing is in store for the US economy. Stateside, this confluence of factors led to a slow burn down for stocks for much of the week as risk-off sentiment gained steam, although Friday’s session was strong following an unexpectedly robust US jobs report. Rather than benefitting from any noticeable flight-to-quality (as risk sentiment worsened), US Treasuries also sold off, most severely on Friday following the strong September jobs report. Yields are higher across the maturity curve, but most severely at the policy-sensitive short-end as expectations for another jumbo reduction in the Fed Funds rate fade. Gold was flattish on the week and has come off its recent highs. The US Dollar gained ground, strengthening as the Bank of England and ECB have now set the stage for potentially more aggressive rate cuts while expectations of the trajectory of future Fed Funds rate moderate. Oil was sharply higher as an escalation in the Middle East tensions following Iran’s missile barrage into Israel at the start of the week increased concerns about a potential disruption in global oil supply.


It feels like equities have moved more firmly into a “select the right names” situation rather than wholesale momentum drivers that move markets sharply higher or lower across the board, with the recent exception being gains in China. Even Chinese stocks have bounced too much for my taste, but it is hard to say definitively just yet since Chinese financial markets were closed most of the week (exception being the Hang Seng), and will be closed again on Monday.


This coming week the focus will mainly be on September CPI, which will be released on Thursday. Also, earnings move back into focus for S&P 500 companies, which starts with the large US banks on Friday.  Is it that time again already?


NEWS THAT MOVED MARKETS LAST WEEK

US jobs

The US added more jobs than expected in September (254,000 vs 140,000 expected), and the unemployment rate decreased to 4.1%, according to the jobs reported released Friday morning by the BLS.   The surprisingly strong jobs report follows the JOLTS report released on Tuesday, which showed that the US job openings were 8 million at the end of August, flat on July.  (Note that the JOLTS report is one month behind the jobs report.)  These reads suggest that the Federal Reserve has done a good job so far of addressing inflation without creating much stress in the US jobs market. With a sound jobs market and inflation drifting towards the 2%/annum target, the US remains on course for a soft landing.  The resilient jobs market also poured cold water on investors who were betting on another jumbo policy rate cut at the early November FOMC meeting.


ISM data for the US

ISM manufacturing data continues to flash red in the US, even though the economy shows few signs of slowing, while ISM services data continues to show strength.  The quote at the start of this update suggests that manufacturing companies are continuing their businesses but remain hesitant to invest due to uncertainty on the horizon, of which the pending US election is the primary culprit.

 

Eurozone data

According to preliminary data from Eurostat early in the week, Eurozone headline inflation is expected to fall to 1.8% in September, with core inflation declining to 2.7%.  The significant drop in headline inflation in the common currency bloc opens the door for the ECB to resume its slow reduction in its key policy rates.  Andrew Baily, head of the Bank of England, also suggested last week that the Bank of England will probably be more aggressive in its future policy rate reductions.  With this context, the Dollar firmed as the Pound and Euro slipped vis-à-vis the US Dollar.

 

On-going geopolitical risks

Repeating the obvious is not always necessary, but I would like to reiterate something I said last week – geopolitical risk is currently causing overall risk to be asymmetrical to the downside.  With the Middle East on edge, Russia continuing to grind away in Ukraine, and the looming presidential election in the US, it is impossible to “wish away” a potential negative surprise. I am not suggesting that you hunker down; rather, be mentally prepared for increasing market volatility because this is what we are likely to experience in the weeks ahead.


MARKETS LAST WEEK

 

Global equities were modestly weaker across the board last week, with the exception of Chinese equities.  Keep in mind though that Chinese financial markets were only open on Monday, although the Hang Seng in Hong Kong did trade all week (+10.2% WoW).  China continues to bounce nicely thanks to a multi-faceted stimulus plan that will be rolled out by the government. Having said that, I have a hard time not thinking that this rally has gone “too far, too fast”, although momentum investors seem to be on board.  Chinese equities have now gone from the worst performing stock market of the year to the middle of the pack, outperforming UK and European equities.


It’s fairly clear now that bond investors got ahead of themselves, as yields continue to edge up across the U.S. maturity curve.  The yield on the  policy-sensitive 2y UST is now 44bps above its low on September 24th, and the yield on the 10y UST is now 35bps above its low on September 16th, heading back towards 4%. Unfortunately, investors now find themselves on the back foot again as the total return on long-duration US Treasuries returns to negative territory YtD.



Corporate credit all-in yields  have drifted higher because of the increase in underlying UST yields,  but credit spreads have continued to grind tighter, especially in more risky high yield.  Investors seem to be continuing to shift into corporate bonds to take advantage of higher yields, although the recent rise in UST yields might slow the migration into corporate bonds.

 


In currencies, the U.S. Dollar was stronger this week while the Euro, Sterling and Yen all lost ground.  Gold was flattish, off its recent highs, and seems to have found a trading range for the time being.   Oil prices soared as fears over supply disruptions increased because of concerns that the Middle East conflict might  broaden.   Bitcoin lost some of its mojo as risk sentiment weakened.  


WHAT’S AHEAD

 

  • Economic data this coming week includes

    • US: Release of FOMC meeting minutes (Weds), CPI (Thurs) and PPI (Fri); consumer sentiment on Friday and plenty of Fed talking heads on the circuit.

    • Europe: Retail sales, industrial production.

    • China: Market closed Monday, trading resumes Tuesday


  • Earnings: Earnings for the quarter ended September 30th will officially kick-off, as usual, with the big US banks (JPM and WFC )on Friday, October 11th.  According to FactSet, earnings growth for S&P 500 companies in 3Q2024 is expected to be 4.6%.  As you prepare for earnings and if you want to dig deeper, the outlook provided by #Factset in their September 20th write-up is very good.


  • Monetary policy meetings:

    • FOMC: Nov 6/7 and Dec 17/18

    • Bank of Japan: Oct 30/31 and Dec 18/19

    • Bank of England: Nov 7 and Dec 19

    • ECB: Oct 17 and Dec 12

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