The holiday shortened week in the US last week helped bulls maintain the initiative. The markets tend to do well during and immediately after the Thanksgiving holiday, although the equity markets were more subdued than usual.
The narrow-focussed Dow Jones gained 1.9% whilst the more sensitive tech focussed NASDAQ fell just over 1.5%.
Review of last week’s key action
FTSE -8 -0.11% DOW +601 +1.78% S&P -7 -0.18% NASDQ -171 -1.53% DAX +67 +0.47% NIKKEI +383 +1.37% Hang Seng +36 +0.21%
The positive mood has been maintained in the US through the Thanksgiving celebrations, although the overall moves on the week were mixed.
Analysts continue to refer to optimism for an explanation of the turn-around in markets lately. The optimistic mood of investors was bolstered further by a slightly more dovish set of minutes from the last FOMC meeting on November 2nd.
Despite raising interest rates by 0.75%, the fourth such rise in so many meetings, the minutes suggested most FOMC members were likely to vote for a slowdown in the pace of rate rises.
On the 10th of November, the inflation data came in better than expected and whilst one swallow does not make a summer, the markets took their cue which has resulted in a significant shift in hopes and expectation.
Investors were hoping that the FOMC would reign in some of their expectations for future rate rises which was the thinking before the most recent set of inflations numbers.
The hope now is that the final CPI reading of the year will not spoil the party – we will have to wait until Tuesday 13th December to find out how inflation has shifted. Up until that date it is unlikely that the markets will reverse course, especially as the following day the FOMC meet for the final time this year with another rate rise expected. The good news for investors is that the probability has shifted to a 0.5% rise rather than another 0.75% rise. This will of course all depend on the inflation data the day before.
The risk-on move in markets has also seen a dramatic improvement in bond yields as investors unwind some of their more bearish bets on the markets. The US Treasury 10-year yield, which peaked at 4.34% in late October, fell further last week to 3.69% as bond prices ticked higher, encouraged by further falls in the oil price.
Sterling markets held on to gains last week as the FTSE remained unchanged, but Gilts followed other international bonds, resulting in the yields falling back to 3.1%, the lowest for 3 months and some distance from the panic levels hit when the Truss government announced their unfunded collection of tax cuts. The treasury and investors continue to breathe a sigh of relief.
EURUSD +0.62 +0.6% GBPUSD +2.00 +1.68% USDJPY -1.19 -0.85%
Forex markets were mostly subdued last week although Sterling was the liveliest as it built on recent gains by rallying another two cents versus the US Dollar and another one cent versus the Euro.
Gloomy reports from the IMF and OECD seem to just underline how tough the challenges the UK faces in dealing with a prolonged recession. But for now, Sterling is enjoying the bounce from Truss induced swoon from late September. Since then, we have had a new chancellor and a new Prime Minister – the state of flux in British politics is a rare phenomenon but it is also clear how destabilising it can be.
Aside from Sterling, the US Dollar remained weak versus other majors falling again mid-week following the publication of the dovish FOMC minutes on Wednesday evening.
Gold +2 +0.11% UK OIL -4.03 -4.59% US OIL -3.6 -4.44% Bitcoin unchanged
Gold simply follows the UD Dollar which had an uninspiring week last week.
Oil markets however succumbed to another wave of selling as traders’ price in further falls in global growth over the next year. The record number of Covid infections in China only served to underline fears for the global economy as China persists with its Zero Covid policy.
Over the weekend demonstrations spread to most major cities as people defied the authorities to call for the end to the restrictions and for Xi Jingping to resign. Curiously, many people in Beijing and Shanghai protested by holding up blank bits of paper – which is a reference to the strict censorship rules in China. I assume no one can be arrested for holding up a blank bit of paper. Or maybe they can?
Data / events for the week ahead
The first week of the new month heralds the release of the non-farm employment data which is another key reading that the Fed will be very interested in. The jobs market has seen little movement since they started to raise interest rates and it is the strength of the employment markets that could back up the reasons for a slower pace in rate rises. Or it could really undermine them.
The unemployment rate and the number of new jobs seem at odds with a slowing economy and the task the Fed have of taming core inflation.
It’s a crucial time for US retailers. Post Thanksgiving the US markets will also be keen to know how the major retailers fared. Data already points to a strong online showing with a record 9 bln on sales. The US National Retail Association was expecting 166 million people were planning to shop between last Thursday and Cyber Monday.
Monday:
Eurozone - Christine Lagarde of the ECB testifying before the Committee on Economic and Monetary Affairs of the European Parliament, in Brussels. Euro and Eurozone assets sensitive to any policy references.
UK - Lord Mayor’s Banquet in London. A chance to get an update on UK foreign policy with a speech delivered by Prime minister Rishi Sunak.
Tuesday:
UK - Governor Andrew bailey testifying before the Lords Economic Affairs Committee, in Parliament.
US - Conference Board Consumer Confidence. Expected to slip back. USD, US equities sensitive,
Wednesday:
Eurozone - Flash CPI estimates. With commodity and energy prices falling, economists expect inflation will peak this quarter in The Eurozone, UK and Australia. Inflation is forecast to slip back to 10.4% following a small downward revision of last month’s number to 10.6% whilst core flash estimate expected to be unchanged at 5%.
US - ADP Non-Farm employment change. A modest decline in new jobs to 200K. Not the slowdown the some still expect to happen. An erratic number that has less impact that the Bureau of labour Statistics number on Friday.
US - Prelim Q3 GDP data. The second reading of this backward-looking data set. After a poor set of readings in Q1 and Q2, Q3 looks to have improved slightly from the initial advanced reading of 2.6% with expectation for a reading of +2.8%. No major effect expected unless it differs widely from consensus.
US - Jay Powell speaking. The chair of the Federal Reserve is speaking about the economic outlook, inflation, and the labour market at the Brooking Institution, in Washington DC. Very on topic and could have any impact on the markets. All USD and global assets could react to this event.
Thursday:
US - Core PCE Price Index. This Personal Consumption Expenditure price index is the Fed’s favoured measure of inflation. Will be closely scrutinised by the markets. Expected to have eased from the previous month’s reading of 0.5% to 0.3% last month.
US - ISM Manufacturing PMI data. A key reading on the manufacturing sector in the US. Dropping below 50 as the effects of inflation and rapid rate rises in the US take their toll on this important sector.
Friday:
US - Non-Farm employment change. Another key data set for the markets with a resilient labour market and rising average hourly earnings providing an additional headache for rate setters at the FOMC. Like the ADP survey, this data is expected to come in softer than the previous month, with 200K new jobs and with an unchanged unemployment rate and a dip in average hourly earnings to 0.3% which could be welcome news. USD, US equities and bonds and global markets of course all sensitive to this release.
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