Monday is Columbus Day in the US. Whilst it is a federal holiday, stock markets will remain open. Only the bond markets are closed in observance of this holiday.
Global markets enjoyed a risk-on move in the first half of last week ahead of the US non-farm employment data. That balloon burst as the headline rate of unemployment fell to 3.5%, where it was pre-pandemic.
The markets this week will have to contend with the monthly inflation reading in the US which will induce some nervous trading ahead of the data release on Thursday.
Review of last week’s key action
FTSE +97 +1.41% DOW +571 +2% S&P +54 +1.5% NASDQ +76 +0.73% DAX +158 +1.3% NIKKEI +1,178 +4.54% Hang Seng +517 +3%
US equities spoiled the party last week when it looked like a risk-on move was building early-on in the week.
The employment data was stronger than most anticipated with 263K more jobs. This was better than the consensus of 248k jobs, but it was the headline unemployment rate of 3.5% that caught the eye. This fell from a previous rate of 3.7% which was due to more new jobs and more people leaving the employment market.
The effect on the market was immediate with the S&P500 falling 2.8% and the NASDAQ falling 3.8% as analysts forecast the Federal Reserve will be unlikely to signal any easing on its pace of rate rises.
Expectations for interest rates at year-end firmed up following Friday’s employment data with a consensus year end-end rate of 4.6% priced in. Current target interest rates are standing at 3.0% – 3.25% which suggests the federal reserve will raise rates by two 0.75% hikes in the two remaining policy meetings this year.
EURUSD -0.61 -0.62% GBPUSD -0.64 -0.57% USDJPY +0.65 +0.45%.
Not surprisingly the US Dollar traded higher following the release of the US employment data. The risk-on move early on last week encouraged further profit taking in the US Dollar but that quickly reversed as traders now expect another 0.75% hike in rates at the November 2nd policy meeting, leaving the US Dollar up on the week.
Sterling has settled following the swoon two weeks ago when the unfunded tax cuts started a spiral sell off in government debt.
It transpires that this was caused by liability driven investing, or LDI, which pension funds employ to make better use of their cash. Well, it turns out that the strategy was not so perfect when the volatility in these bond markets went through the roof. The Bank of England stepped in at the 11th hour and provided a back-top which calmed the market. In the end the bank bought only a fraction of what they could have bought. The Bank announced on Monday a plan to an orderly end to its emergency bond buying.
Gold +32 +1.93% UK OIL +13.09 +15.35% US OIL +13.49 +16.9% Bitcoin unchanged
Gold experienced a short squeeze and traders rushed to close shorts as the US dollar slide early on last week. Like the US Dollar, Gold retraced some of the earlier moves but still eked out a gain of $32 on the week.
Oil jumped sharply higher as the OPEC+ oil cartel decided to cut production by 2 mb/d in a slap in the face to the Biden administration and the West in general. The US and the West will not forget these actions as Saudi Arabia seems to have sided with Russia in manipulating the price higher which will only prolong the war and play into Putin’s hands. Shame on them.
Ahead of the mid-term elections, the Biden administration described the decision as “unhelpful and unwise” for the global economy. This should read for the Democrats prospects in the mid-terms.
Data / events for the week ahead
Not a particularly busy calendar this week following non-farm employment data last week. However, we do have the all-important inflation reading that will be very closely watched by global markets.
Monday
US - Columbus Day. All markets bar the bond markets will remain open.
US - FOMC member Lael Brainard speaking at National Association for Business Economics Annual Meeting about price stability. Could be interesting.
Tuesday
UK - Employment and average earnings data. Still surprisingly strong.
UK - BoE Governor bailey speaking at the Institute of International Finance Annual Membership Meeting, in Washington DC
Wednesday
US - Core Producer Price index. A leading indicator of future trends in inflation.
Eurozone - ECB president Lagarde speaking at the Institute of International Finance Annual Membership Meeting, in Washington DC.
UK - Monthly GDP Data. Historical measure of output. Prone to revisions. Released about 40 days after period end. Quarterly figure is more reliable. Expect a flat reading for August.
US - Minutes from last FOMC meeting. Markets will be sensitive to any further clues about the scale of rate rises to come.
Thursday
Germanyinal CPI reading. Monthly figure – expected to remain unchanged at +1.9%
US - Inflation data. Core CPI – Last month’s number was higher than forecast. Analysts expect a drop back to 8.1% from 8.3%. US and global markets very sensitive to this release. The core reading is also expected to drop back following the surprise jump last month. All US and global markets sensitive to this release which has a direct bearing on the path of US interest rates.
Friday
US - Core retail sales. Excludes auto sales which can be volatile. Analysts expect a further slight fall. Any reading that suggests the economy could be cooling will help equities as the market prepares for another 0.75% hike in three weeks’ time.
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