So, what do we know?
(A forex, index, and commodity market review)
Global stock markets recovered losses earlier on in the week following the release of a mixed US Non-Farm employment report. Oil finally succumbed in dramatic fashion to the likely effects of interest rates remaining higher for longer in the US and elsewhere and a dire forecast by the World Bank about China’s economic prospects next year.
Over the weekend Hamas in Gaza attacked Israel resulting in a significant loss of life on both sides. The immediate concern, aside from the dead and injured, is an escalation in the conflict where Hezbollah, funded by Iran, get involved which would have greater implications for markets. Whilst neither Israel nor Palestine produce any oil, the declaration of war will be a destabilising influence in the Middle East, which could affect oil production and supplies. Crude oil jumped up over 5% initially and its further rebound depends on whether the conflict escalates or not.
Weekly change (amount change and percentage change on the week)
FTSE -66 -0.86%
DAX %
DOW -109 -0.33%
S&P +16 +0.37%
NASDQ +245 +1.66%
NIKKEI -491 -1.54%
Hang Seng -24 -0.14%
China was closed for the whole of last week in celebration of national Day. There might have been quite a lot of navel-gazing by the Beijing administration during the holiday following the release of more weak data from the Caixin PMI data release which were weaker in both the manufacturing and services sectors.
The trend in worsening data reinforces the view that China’s economy is struggling under the burden of a heavily indebted property and house building sector. The World Bank announced a cut in its forecast for China’s GDP from 4.8% to 4.4%,citing increased household debt and lagging private sector investment. Whilst most western economies would envy a GDP of 4.4%, this level of output is less than the Administrations target of 5%, which is the lowest growth forecast for over two decades.
The release of the Non-Farm Employment report last week provided a significant bout of volatility from what initially looked like a strong report. The number of new jobs created in September was 336K, which far exceeded the consensus of 171K. The report also upgraded the number of jobs created in August by 40K.
The initial market reaction was what you might expect following the blowout number of new jobs, as equities sunk in reaction to the likelihood of another rate rise this year. Within two hours following the release, many analysts and investors concluded that the jobs data contained some positive elements that painted a less inflationary picture. Whether the data on its own is strong enough to weigh on the Fed’s thinking remains to be seen, with a rate rise by year-end still a close call.
The labour market remains strong but the drop in average earnings to 4.2% from 4.3% was encouraging whilst the unemployment rate remained at 3.8% despite the number of new jobs. To many observers the data implied the jobs market would likely experience a preferred soft landing in the face of the rapid rise in rates over the past 15 months.
US equities rallied into the close, pushing the NASDAQ up 1.6% and the S&P500 up 1.2%, its best day for 5 weeks.US Bond yields continued to climb, reflecting the general held view now that rates are likely to remain higher for longer next year. The Fed monitors closely the yields across all US Treasuries (sovereign US bonds) and will be aware of the drag on economic output that the rise in yields over the past month will cause. The Yield on the 10-Year Bond has jumped to 4.79% from 4.30% a month ago, whilst the 30-year Bond, which most mortgages are based on, jumped to 4.96% from 4.38% a month ago.
UK and European markets were weaker, with the FTSE100 struggling following surprise collapse in crude oil which resulted in oil majors such as Shell and BP falling 5% on the week. The weak surprisingly Construction PMI data released last Thursday also undermined confidence in the construction and house building sectors.
EURUSD +11 +0.10%
GBPUSD +39 +0.32%
USDJPY -8 -0.05%
The US Dollar was mixed last week, which looks more like a pause in the strong rally the US Dollar has experienced over the past 11 weeks. Last Friday’s Non-Farm employment report resulted in the US Dollar giving back its gains from earlier on in the week, as the NFP data suggested the Fed will have to see what the CPI reading is before committing to another rate rise this year.
Gold -16 -0.87%
UK OIL -8.08 -8.80%
US OIL -8.22 -9.14%
It was only a few days ago that oil analysts were discussing the $100 per barrel level and the inevitability of Brent crude hitting this level as most developed economies approach the Autumn and winter seasons when demand can shoot up. The sudden acceleration in Crude Oil’s sell off, which started the previous Friday, caught many by surprise. On Wednesday last week, crude oil fell over $5, which was the largest daily fall since August 2022. By the close last week, crude oil was nearly 9% lower on the week, a 5-week low. The main reason for the sell-off was concern over persistently high interest rates being a drag on growth and oil consumption. In addition profit taking was a significant reason as traders rushed for the exit, the sell off accelerated as hedge funds capitulated forcing further selling.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Following Non-Farm Employment data and the better-than-expected average hourly earnings data we have US CPI to contend with, which will set the tone as to whether the Fed will raise rates again at one of the two remaining meetings this year. We also have China CPI report, as the country grapples with the threat of deflation. The release of the last FOMC minutes which may provide further clues regarding the likelihood of a rate rise before year end.
Monday
US Columbus Day Bank Holiday. Banks closed. Bond markets closed; all US equity markets remain open.
Tuesday
China New Loans to businesses and consumers. May back-up the report from the World Bank about how indebted households are.
US FOMC member Waller speaking at George Mason University Conference, in Washington DC.
Wednesday
US PPI release. Value of goods and services going into production. A leading indicator of potential future inflation. Headline reading expected to fall but core rate expected to remain at +0.2%
US FOMC minutes from last meeting. Clues to likelihood of another rate rise before year end. USD, and US assets sensitive.
Thursday
UK GDP reading for August. Industrial production and Manufacturing data. A modest improvement expected. GBP sensitive.
US CPI inflation data. Core +0.2% m/m expected, 4.1% annualised whilst . Headline expected at +0.2% m/m. 3.6% annualised. USD, and US assets sensitive.
Friday
China CPI and PPI data. China could suffer from a bout of deflation but expected to be short lived. PPI expected to show input prices still falling which could pressure CPI in the months to come.
UK BoE Governor Andre Bailey speaking at institute of International Finance Annual Membership Meeting, in Morocco. Any comments re rates will be seized upon. GBP sensitive.
US Prelim University of Michigan Consumer Sentiment, including inflation expectations. USD and US assets sensitive.
