So, what do we know?
(A forex, index, and commodity market review)
On the weekend of 7th / 8th October the Hamas terrorist organisation attacked Israel, slaughtering and butchering Israeli citizens that has provoked an all-out war between Hamas (not Gazans) and Israel. The logic of the attack by Hamas is not obvious but clearly the reaction has been devastating for ordinary Gazans.
As we mentioned last week, just how destabilising this war will be depends on whether other factions, such as Hezbollah, get involved. Such an escalation poses significant risk for peace across the whole of Middle East. Already the conflict has resulted in thousands of deaths whilst the uncertainty about any outcome caused oil to rally sharply at the end of last week as Israel took measures to strengthen its northern defences against any Hezbollah incursions and attacks.
Weekly change (amount change and percentage change on the week)
FTSE +89 +1.18%
DAX -125 -0.81%
DOW +192 +0.57%
S&P +8 +0.21%
NASDQ -13 -0.09%
NIKKEI +542 +1.72%
Hang Seng -+43 +0.24%
Early last week, global markets were waiting for developments in the Israeli / Hamas war as traders remained nervous about potential for a significant escalation in the conflict.
Aside from the conflict, there were several releases that investors hoped would inform about the intentions of the Federal Reserve regarding a further hike in interest rates this year.
The eagerly anticipated US inflation data was preceded by the release of the minutes of the FOMC (Federal Reserve rate setting committee) meeting held on 20th September. Whilst some may find it odd that the minutes aren’t released until 3 weeks after the event, the minutes underlined the central bank’s caution with rates. The committee members decided not to raise rates at that meeting, but the minutes suggested most members implied another interest rate might be appropriate, which is at odds with the forward rate markets in the fed Watch tool provided by the CME.
The Federal Reserve will of course consider the jump in Treasury bond yields since the meeting, which has seen yields from 5-year through to 30-year maturities throughout the last three weeks. This implicit tightening in monetary conditions, if sustained, will be a drag on economic activity, which the Fed has no direct control over, but which is likely to reduce the likelihood of another rate rise before year end. However, the war between Hamas and Israel may well result in yields falling as investors move into the safe-haven assets, such as sovereign bonds.
The markets also noted comments by Atlanta Fed president Raphael Bostic who said that Federal Reserve did not need to raise interest rates further and said he was not expecting the US to enter a recession in the near term. That is the ideal outcome for investors but how that pans out depends on several factors; not least the Israel / Hamas conflict that adds another significant dose of uncertainty to this global macro melting pot.
US inflation data was hotter than most forecasts with headline CPI coming in at 3.7% y/y versus 3.6% expected. Core inflation, which strips out the volatile energy and food components, fell to 4.1% from 4.3% but contained some concerns about key components of the report such as housing and shelter costs which increased 0.6% m/m.
Investors have absorbed the recent employment report and this inflation report; this paints a picture of a more resilient US economy which is hardly slowing down despite the rise in rates over the past 18 months. If anything, economic activity remains robust, for now. US indices reflected the concern over the strength in the US economy, although Friday’s falls were as much about the conflict in the Middle East and the jump in oil prices as it was about tightening monetary conditions.
European markets tracked the US markets and the move in treasury yields which were mirrored in European bond yields. UK markets had a better week with the energy sector rising on the back of the spike in oil prices last Friday which partly offset the downside of rising oil prices for other sectors.
The outlook for interest rates looks finely balanced with BoE Chief Economist, Huw Pill, who said the decision was finely balanced as the economy recovered slightly in August following a fall in activity of 0.6% in July. Market commentators believe the BoE is likely to leave rates unchanged again when they meet on 2nd November.
EURUSD -0.78 -0.74%
GBPUSD -0.94 -0.76%
USDJPY +0.32 +0.21%
The US Dollar reacted to the FOMC minutes and slightly worrying inflation data last Thursday although expectations for a rate raise have almost been written off for the next meeting on November 1st. The US Dollar gained on the back of the CPI data as rate expectations nudged higher. However, the conflict in the middle east ratcheted up several notches with more murdered Israelis uncovered in the Kibbutz whilst the Israeli Army gave Gazans 24-hour notice to leave Northern Gaza, signalling an impending ground offensive into Gaza. The US Dollar befitted with the flight into safe-haven assts such as the US Dollar and Gold, and ended the week building on gains following the CPI data.
Gold +101 +5.51%
UK OIL +6.089 +7.27%
US OIL +4.76 +5.83%
Commodity markets jumped last Friday following the scalation in the conflict between Israel and Hamas. Gold, which acts a lightning rod for global macro angst, jumped $100 last week, its biggest weekly rise since mid-March during the mini-banking crisis. Oil jumped last Monday following the Hamas attack on Israel over the previous weekend. The ratcheting up in the conflict last Friday, which brings significantly increased risks to the Middle East and the flow of oil. The jump in prices had been muted up until last Friday, when the price accelerated by jumping $4.25, reflecting the increased risk to global production.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Monday
US Empire State Manufacturing Index. Data from one of the larger manufacturing states (New York) will inform markets about the state of Manufacturing. Expected to fall below zero to -6.4
Tuesday
UK Claimant Count and average earnings. Unemployment data that will affect MPC’s decision about whether a further rate hike is necessary. An increasing number of analysts believe that the UK is at the top of its interest rate raising cycle and that no more are needed. Whether the BoE and the MPC agree is another matter. A slight increase in claimants with average earnings slipping back. GBP sensitive.
Germany ZEW economic sentiment. A survey of German institutional investors and analysts. Still not that rosy as Germany is at risk of entering recession as the EU powerhouse struggles in the wake of the energy spike and slow-down in China.
US Core Retail sales. Excludes transport items. Expected at +0.2% as consumers cope with higher costs. This will be the 5th month in a row of a positive reading. USD and US assets sensitive.
Wednesday
China Industrial production, retail sales and GDP for 3rd Quarter. GDP likely to the most telling release, as China struggles post Covid-lockdown and with the weight of the troubled property and house building sectors exerting a drag on growth. Expect GDP of 4.5% versus 6.3% in Q2
UK CPI Inflation release. Headline expected at 6.6% versus 6.7% last month. Several economists expect inflation to fall to 5% by year end. The swaps market currently implies a probability of just 50% of a further rate rise in early November from the BoE. GBP and UK assets sensitive.
US FOMC member Waller to speak about the economic outlook at the Distinguished Speaker Seminar hosted by the European Economics and Financial Centre, in London. Clues about prospects of a further rate rise always welcome.
Thursday
US Philly Fed Manufacturing Index. Second release regarding Manufacturing sector this week. Expect an improvement from the Philadelphia district although still well below the zero level, which marks outs out contraction from expansion. The interest rate rises over the past 18 months in the US has a disproportionate effect on the manufacturing sector and with little signs of any cuts expected in H1 next year, the manufacturing sector remains repressed.
US Chair of the Federal Reserve, Jay Powell, speaking at the Economic Club of New York Luncheon. An Economic club – what better place to articulate your views a little about that much talked about rate rise. USD and US assets sensitive.
Friday
China Interest decision, as such, from PBoC. No change in the official rates despite China flirting with deflation. Pouring oil on the troubled waters of the property and housing sector is something Beijing will want to avoid.
UK Retail Sales. A fall of 0.3% expected as the UK is affected more by seasonal effects.
