So, what do we know?
(A forex, index, and commodity market review)
The escalating war in the middle East continued to pressure stock markets last week, as oil finally jumped sharply higher following remarks by President Biden that Israel could engage in military strikes against Iran’s oil industry. Last Friday’s US Non-Farm employment data provided welcome news that helped US markets recovery all their week’s losses by the close.
Weekly change (amount change and percentage change on the week)
FTSE +12 +0.14%
DAX -200 -1.03%
DOW +13 +0.03%
S&P +8 +0.14%
NASDQ +18 +0.08%
NIKKEI +2,224 +5.93%
Hang Seng +1,741 +8.36%
Global stock markets are weary of the escalating war in the middle east and the effects it could have on economic growth if trade routes and oil production are affected by hostilities. President Biden announced details of discussions with Israel about possible retaliatory strikes by Israel against Iran’s oil infrastructure following the missile attack on Isarel by Iran last Tuesday. Despite the escalating war and prospect of disruption to oil supplies, equity markets managed to recover losses from earlier on in the week, as US data buoyed the markets.
ISM Services PMI reading last week came in far better than consensus, at 54.9 versus 51.7 expected. It almost looks too good as the 54.9 reading reached the highest level since March 2023. The mood was further bolstered last Friday with the release of the Non-Farm employment change with the news that 254K new jobs were created in September, far higher than the consensus number of 147K and with a revision increase of 17K in new jobs in the August data.
Despite the impact this news had on interest rate forecasts for the remaining two FOMC meeting this year, equity markets rallied sharply as traders had often fretted than the jobs market waws cooling which could possibility have led to a mild recession in the US.
Not so, based on this data, with the average earnings picking up to +0.4% and the headline unemployment rate falling to 4.1%.
No surprisingly interest rate expectations adjusted to the likelihood that the Fed will only cut by 0.25% on the 7th of November FOMC meeting. Jay Powell had said as much last Monday, at the National Association for Business Economics Annual Meeting, when he implied another 0.5% cut was unlikely. Currently, the CME Fed Watch tool has a near certain 0.25% cut in November, whereas just a week ago there was a 53% probability of a 0.5% cut.
Chinese markets continued their remarkable run following the announcement of measures to stimulate the economy. Before the golden Week holidays last week, the Hang Seng was already up over 15%. By the close last Friday, Hong Kong’s Hang Seng was up another 8.4%, which leaves the index up 30% so far this year, making it the best performing major market which is remarkable.
UK equity markets are now waiting for the much-anticipated budget to be delivered by the new labour administration on 30th October. Businesses are also concerned about what measures will be included in the employment reforms to be included in the Employment Act to be announced this Thursday.
The budget dominates the press. This administration has chosen to have its first budget 16 weeks after to coming to power – far later that all incoming governments in the last 30 years.
The chancellor will want to raise more than £22 Bln which can only come from a few sources, such as pension reforms, Capital gain tax and inheritance tax. Unfortunately, the Labour administration have worried the electorate more than they should have done which has resulted in a plunge in consumer confidence. Something that Rachel reeves should be more mindful of is she wants the UK to grow as much as planned.
EURUSD -1.87 -1.68%
GBPUSD -2.54 -1.90%
USDJPY +6.51 +4.58%
The US Dollar rallied sharply last week, with the Dollar Index reaching its highest level in over 6 weeks as traders reversed short trades as the escalating middle east war caused a flight into the US dollar. Much stronger ISM Services data and non-farm payroll data caused traders to completely revers any speculation about the possibility on another 0.5% cut by the Federal Reserve at the November 7th meeting.
Sterling weakened after Andrew bailey suggested rates could be cut more aggressively if the data remained consistent with inflation heading towards the 2% target. Huw Pill, the BoE economist, countered these remarks by saying rates would need to be cut cautiously. Clearly not in total agreement but Sterling remains 2 cents weaker as a result.
The Japanese yen had a volatile week with Japanese Prime Minister Shigeru Ishiba’s comments mid-week when he said that the Japanese economy was “not in an environment” for further interest rate increases. Markets jumped on the remarks which resulted in a jump in the USDJPY rate by 3 yen as traders speculated that the Yen could fall back to levels reached in early July. Ishiba became prime minister at the end of September and called an early election, scheduled for 27th October, a year earlier than was expected. Analysts expect more volatility as the campaigning gets into full swing ahead of the 27th of October.
Gold Unchanged
UK OIL +6.18 +8.60%
US OIL +5.88 +8.60%
Oil recorded its biggest weekly gain since January 2023 as the war in the middle east escalates, as many traders feared would happen. Israel expanded its campaign against Hezbollah with the launch of a ground offensive in southern Lebanon and very intensive bombing of Hezbollah infrastructure in Beirut. It has long been feared that, with an escalating war, oil infrastructure would be targeted, disrupting oil supplies from the most important oil exporting region in the world. Last Thursday Biden announced discussions his administration had with Israel about targeting Iran’s oil industry in retaliation to the missile attack launched by Iran last Tuesday. On Friday, Biden countered those remarks by suggesting Israel should consider other options.
Gold was buffeted by the escalating war in the Middle east whilst being constrained by the sharp rally in the US Dollar.
This week’s data and events to watch out for.
A week for data following the US employment data last week. The war in the middle east provides much uncertainty which we cannot plan for although markets have factored in already disruption to oil supplies in the event Israel attacks Iran’s oil infrastructure.
The highlight this week is the release of the FOMC minutes from the 18th of September meeting. We also have US CPI inflation data which will impact interest rate expectations. In the Uk we have the Monetary Policy Hearings at the Treasury Select Committee.
Monday
No major releases today
Tuesday
US a selection of FOMC members speaking. The more interesting one being Raphael Bostic speaking about the economic outlook and monetary policy in Atlanta.
Wednesday
New Zealand Interest rate decision by RBNZ. Swaps market implies a 75% chance of a cut of 0.5%. NZD sensitive.
US FOMC minutes from September 17th / 18th FOMC meeting. Prospects for a 0.5% have all but disappeared so expect few surprises on the downside. USD and US assets sensitive.
Thursday
UK Monetary Policy Hearings. Andrew Bailey and members of the MPC attend the Treasury Select Committee in Parliament to testify about inflation and economic outlook. GBP sensitive.
US Headline and core CPI inflation data. Core CPI expected at +0.2% with headline expected at +0.1% giving an annual reading of 2.3%. Inching towards the Fed’s target of 2%. USD and US assets sensitive.
Friday
UK Monthly GDP data. +0.2% expected.
US headline and core PPI data. The costs of good and services going into production. Referred to as factory gate prices this data is a leading indicator to future inflation data. Core expected at +0.2% with headline expected at +0.1%. USD moderately sensitive.
US University of Michigan consumer sentiment. Expected at 70.5 (last at 70.10)
