So, what do we know?
(A forex, index, and commodity market review)
US equities closed out the month and the third quarter last Friday, with a loss of 3.7% on the quarter as markets succumbed to expectations that interest rates may still go higher and will stay higher for longer than previously anticipated.
Equities had another tough week as investors continue to fret over the possibility of a further hike in interest rates this year with little prospect for rate cuts until at least the end of H1 2024.
Most developed stock markets fell again last week as US sovereign bond yields continues to climb. The 10-year bond yield hit another 14-year high above 4.60% whilst the 2-year note, which is more sensitive to interest rates expectations, hit a high at 5.1% mid week but fell back slight to close at 5.05% on Friday.
What is causing bond traders to sell bonds, pushing yields to multi-year highs. Since the last FOMC meeting, held on 20th September, investors have taken on board that rates could still be raised another notch higher by the Federal Reserve whilst the prospect for a cut in rates has been put back to the start of H2 next year.
The PCE (Personal Consumption Expenditure) data released last Friday provided some relief for the markets and the Federal Reserve. PCE, a measure of inflation preferred by the Federal Reserve, came in at +0.1% versus consensus of +0.2%. Some economists were expecting +0.3% following the stronger CPI release from just over 2 weeks ago. The softer PCE helped the markets rebound modestly Friday, following falls earlier on in the week.
Markets also reacted positively to comments from John Williams, president of the New York Fed, who said that the Federal Reserve was “at, or near, the peak level” of its monetary tightening, and that the Fed expects inflation to decline towards 2% in 2024.Despite the better-than-expected PCE data and positive comments from John Williams, major indices closed out the quarter with losses of 3.7% for the S&P500 sand 4.1% for the NASDAQ. However, this is only a fraction of the gains achieved in H1 when the S&P500 gained 13% and the NASDAQ gained a whopping 32%.
When equities closed in New York on Friday afternoon, investors were also increasingly concerned about hardline Republicans who were determined to wreck the chances of Congress approving an increase in the debt ceiling. The ratings agency, Moody’s, said that a shutdown of government because of a failure of congress to raise the debt ceiling would likely leads to a review of the US triple A credit rating.
The deal over the weekend, which came as a surprise to many, removes that uncertainty for now as Congress agreed to a short-term funding deal that provides funding until 17th November, by which time Congress will have to find a way to agree on a new funding deal.Crucially the new short-term funding deal excludes any new aid for Ukraine, which was a key demand of the democrats. The right-wing group of Republicans, who wanted cuts to spending across the board, were incensed that the speaker of the House, Kevin McCarthy, decided to put the deal to a vote. Those same hardline right-wing republicans are now calling to have Kevin McCarthy removed from his role as speaker.
Markets will be satisfied for now, but the same stress levels will build as we approach the 17th of November. A downgrade to the US triple A rating may not be viewed too negatively by markets, but if no agreement is reached on November 17th and the unthinkable happens when US could default on its debt, markets would fall sharply.
European markets tracked US markets lower with the FTSE losing just over 1% despite UK Gilt yields falling on the week, resulting in a lowering of mortgage rates as investors and traders now expect the Bank of England to be close to concluding the current tightening phase.
2-year Gilt yields, more sensitive to inflationary expectations and more directly correlated with interest rates, fell to 4.91% from 5.07% the previous week.
EURUSD -0.71 -0.66%
GBPUSD -0.33 -0.26%
USDJPY +0.97 +0.65%
The US Dollar continues to make ground versus the majors with both the EURO and Sterling slipping further, notching multi month lows. Sterling remains the weakest major currency with hedge funds continuing to ditch the currency as their bullish best on sterling went sour.
Gold -76 -3.95%
UK OIL -0.38 -0.41%
US OIL unchanged
Gold appeared to be defying the significant recovery in the US Dollar, which started back in mid-July. Any US Dollar based commodities typically fall when the US Dollar rallies. However, normal service was resumed last week as Gold was hit by a wave as selling as traders finally accepted that rates will not be coming down any time soon. The weekly fall was $76 (just under 4%), the biggest weekly fall in 15 months.
Oil traded sideways to lower as the US Dollar firmed further, albeit only modestly. Traders continue to eye the $100 level, but speculative demand was not there as oil slipped $3 from highs last Thursday.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
With the start of a new month, and new quarter, we have the release of the US Non-farm Employment data. In addition, we have two further central bank policy meetings that will add to the debate about whether central banks are right to pause or conclude their tightening cycles.
Central banks are not convinced that inflation will continue to fall to their target levels of 2%. It could well be that most official interest rates have to remain elevated, as some refer to it, whilst others describe the increase in interest rates as a normalisation in monetary policy generally.
Monday
China Bank Holiday in China throughout the week celebrates National Day.
US ISM manufacturing PMI – Signs that manufacturing decline over the past few months is stabilising. Expected at 47.8. Below 50 still separates contraction from expansion in the sector. USD and US assets sensitive.
US Jay Powell, Chair of the Federal Reserve, participating in a roundtable discussion with workers, small business owners, and community leaders, in New York. Q&A at the end could be interesting.
Tuesday
Germany Bank Holiday – German Unity Day. German markets closed.
Australia RBA policy meeting. In common with many other central banks, the RBA is expected to keep rates on hold this time.
Wednesday
New Zealand Reserve Bank of New Zealand policy meeting. Another central bank expected to keep rates on hold as the effects of previous rates rises are yet to be felt.
OPEC - JMMC The Cartel’s 13 members meet to manipulate prices or is that balance world supply and demand – likely the former.
US ADP Non-Farm employment change.155K new jobs (Last 177K). Friday’s data is the key release whist this data can be volatile and unreliable.
US ISM Services PMI. A fall expected to 53.5 following last month’s better than expected reading of 54.5.
Thursday
UK Construction PMI. 50 expected, prospects looking bleaker for the sector.
Friday
US Non-farm employment change. 168K new jobs expected in September. Average hourly earnings of +0.3% with an unemployment rate of 3.7% expected, following last month’s surprise jump to 3.8%. USD, US, and global assets sensitive to this release.
