The combination of China serving up all sort of stimulus measures in two phases – one package at the beginning of the week and a second package at the end of the week – pushed Chinese equities sharply higher, dragging any and everything with a Chinese connection along with it. AI also popped back onto front pages, re-energised by in-line earnings from semi-conductor company Micron Technology (MU) and – more importantly – revised upward guidance for the next quarter. Alongside this news, US economic data was good, continuing to suggest that the US is gliding towards a soft landing. Bundle all this together and the result was another week of further gains in global stock prices and relatively stable bond yields across the curve. Gold’s recent gains paused and oil prices plummeted. Bitcoin was also a star of last week, grabbing firmly onto the risk-on sentiment and heading back above $65,000.
We have US payrolls report for September that will be released next Friday, as well as the JOLTS report the day before, so investors will be firmly focused next week on the state of the US jobs market. Keep in mind that the third quarter ends on Monday so investors will turn their attention to earnings. The large US banks will kick-off the quarterly earnings season on October 11th (JPM, WFC), and the first of the Mag7 companies – TSLA – will release their earnings on October 16th.
NEWS THAT MOVED MARKETS LAST WEEK
Chinese stimulus: China unleased two phases of stimulus measures last week, the first on Tuesday and the second on Friday. The first phase included things like reducing interest rates, lowering the reserve requirements of large banks (to stimulate lending), and taking several steps to revitalise the troubled real estate market. On Friday, news sources reported that China intended to issue new bonds to fund its stimulus plans, and take other steps to address its flailing property market. Investors in Chinese equities and anything related to China (e.g. luxury goods companies, basic resources companies, etc) cheered the decision. But will it be enough? I can’t help but draw parallels with the “lost decade” in Japan in the 1990s. Keep in mind the rather opaque nature of relationships between Chinese banks – the most important of which are state-owned – and the troubled Chinese property sector. As we know from Japan’s own problems with the property sector in the 1990s, drip-feeding solutions to a troubled property market and banks loaded with bad property loans does not work. Ultimately, a mega-dose of painful measures including cleaning up banks’ balance sheets and letting weak property companies fail might be the only thing that will cure the problem. So the question is simply, “has the Chinese government done enough?”
Stop-gap budget measure: Congress passed another stop-gap budget funding plan, this one for three months (through December 20). It was led mostly by Democratic support in the House as there remain adamant holdouts among the ultra-rights in the Republican party. Whatever happened to the good, old-fashioned annual approval of a budget each year? I suppose that at least the back-and-forth threats of a government shutdown just before the Presidential election were avoided.
MU earnings / AI: Micron Technology (MU) released in-line earnings for its 4Q2024 mid-week, and revised their next quarter’s earnings higher. The strong results and favourable outlook revolved around better-than-expected sales of AI-related chips, pulling anything AI-related along with it. MU was up over 18% WoW.
PCE – the Fed’s preferred measure of inflation – was released on Friday before the open and was in-line for August, continuing to slowly decline towards the Fed’s target of 2%/annum. The graph below from #CNBC illustrates the trajectory of headline PCE since inflation started to increase in early 2021.
The in-line PCE data is another indicator that inflation is heading towards the Fed’s target, providing a clear glideslope for the Fed to lower its policy rate in the months ahead as it pivots towards the second-prong of its dual mandate – a stable the US jobs market.
The University of Michigan Consumer Sentiment Index came in at 70.1 on Friday (vs 67.9 in August), its highest level since May 2024 and up 13% compared to one year ago. This was another indicator that the US consumer is feeling increasingly positive about the outlook for the US economy.
MARKETS LAST WEEK
Global equities were firm across the board last week, with Chinese equities leading the charge after the Chinese government (finally) served up a comprehensive package of stimulus measures that sent sentiment for anything remotely connected to China soaring. Naturally, this feel-good spilt over to emerging markets equities (of which China is the largest component), which also rallied strongly on the week. Japanese equities were also up strongly, re-approaching the 40,000 threshold. European and US equities were also better albeit not to the extent of Asian equities.
US Treasury yields moved around a bit this week, but by the end of the week were little changed, with yields up only a couple of basis points at the intermediate and long end of the maturity curve. Yield migration at the short-end of the curve is suggesting further Fed rate cuts, but yields at the longer end seem stuck for now as the US economy continues to show resiliency and recession fears fade. For now, the US economy remains firmly in “Goldilocks” territory.
Gold was flat on the week. The US Dollar was slightly weaker, with the $/£ and $/€ exchange rates now at $1.337/£1.00 (highest since 1Q2022) and $1.162/€1.00, respectively. The Yen strengthened, too, albeit in an orderly fashion. Oil prices fell in spite of the unrest in the Middle East ratcheting up. Bitcoin was sharply higher on the week, feeding on the risk on sentiment in global equities.
Corporate credit was largely unchanged on the week.
The tables below capture the performance of the indices and asset classes traced by EMC.
WHAT’S AHEAD
Economic data this coming week includes
US: Plenty of Fed talking heads will be on the circuit this week. Focus towards the end of the week will be on the JOLTS report on Thursday, and the jobs report for September on Friday.
Europe: Flash CPI for the Eurozone for September on Tuesday and PPI on Friday; retail sales for Germany will be released on Monday, relevant because of Germany’s economic woes at the moment,
Japan: retail sales and some manufacturing data
China: Manufacturing and services PMI for September, although keep in mind that this is looking back (September) while investors are looking forward towards the positive effects of the various stimulus measures announced last week
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.
US Vice Presidential debate: The vice presidential debate is set for Tuesday evening, October 1 starting at 9pm EST. The 90-minute debate is sponsored by CBS. Does anyone care?
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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Tim - excellent summary as always. Just to note, the consumer report of Michigan is diametrically at odds with the Conference Board report. Dont know if anyone could explain this.