2024 Weekly Update

Market update

The S&P 500 closed the week at 5,738.17, +0.62% higher. The Dow Jones closed at 42,313, +0.59%, with the Nasdaq higher by +0.95%. The volatility index VIX closed the week at 16.96, up from 16.15. The Euro Stoxx 600 rose +2.69%.

The 10-year UST closed at 3.75%, up from 3.74% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -87 bps. US Corporate Bond spreads: Investment Grade spreads remained at 168bps and High Yield spreads narrowed -1bp at 343bps. German 10-year Bunds yield closed at +2.13% down from +2.21% a week before. In Europe, Corporate Investment Grade spreads remained at 128bps and High Yield widened +2bps at 366bps.

The US Dollar Index (DXY) depreciated -0.34% last week and closed at 100.38. The Euro closed at 1.1162 (+0.00%); the Yen appreciated +1.14%, closing at 142.21 and the Swiss Franc appreciated +1.11%, closing at 0.8406. Gold closed at $2,658.24, appreciating +1.39%. Oil was lower, Brent closed at $71.98 (-3.37%) and WTI at $68.18 (-5.20%).

Macroeconomy

China stimulus

The People's Bank of China (PBOC) has announced significant changes to its monetary policy. They will reduce the Reserve Requirement Ratio (RRR) by 50bps, bringing it to around 6.6%. The short-term policy rate will also be lowered by 20bps. These cuts are unusual to happen simultaneously and are relatively large compared to previous ones. The PBOC will lower the Open Market Operations (OMO) rate, prompting banks to decrease lending rates. Deposit rates will also be lowered accordingly. The PBOC governor hinted at further RRR cuts in the future. In housing policy, the PBOC plans to lower mortgage interest rates and reduce the downpayment requirement for second homes. They will increase the coverage ratio for government-relending to support house purchases. To support the equity market, the PBOC will introduce equity market swap facilities and a relending tool. These aim to provide liquidity support for purchasing stocks and facilitate lending to listed firms. The PBOC is also considering the establishment of an equity market stabilization fund.

US data

US labor market data remains mixed. On the one hand, the Conference Board labor market differential widened further in September, pointing to new jobs becoming increasingly “hard to get” and consistent with a further rise in the unemployment rate. Moreover, the employment component of the Richmond Fed survey deteriorated very sharply this month. On the other hand, weekly jobless claims remained broadly stable, in line with seasonal patterns, suggesting no imminent surge in layoffs. This coming Friday, Sept. non-farm payrolls will be published with analysts expecting an increase of 146k on average. On Friday, we got the August numbers for PCE inflation, which is the measure that the Fed officially targets. This came in slightly below expectations, with headline PCE inflation down to +2.2% y-o-y (vs. +2.3% expected), which is only just above the Fed’s 2% target, and the lowest reading since February 2021. Annual core PCE was in line with expectations at +2.7%, but with the monthly reading a touch lower at +0.1% (+0.13% unrounded vs. +0.2% expected). Lastly, the revised national accounts data coming with the second estimate of Q2 GDP painted a picture of the US economy that emerged from the pandemic in an even strong shape. Upward revisions to quarterly real GDP were larger than downward revisions over the last few quarters. Corporate profit margins as well as household income were revised higher as well. As a result, the personal savings ratio was revised substantially higher in Q1 (from 3.8% to 5.4%) in Q2 (from 3.3% to 5.2%).

US real estate

Applications to refinance mortgages surged for a second week as more Americans capitalized on the cheapest borrowing costs in two years. The Mortgage Bankers Association’s refinancing index jumped 20.3% in the week ended Sept. 20 to the highest level since April 2022, the group said Wednesday. The contract rate on a 30-year fixed mortgage eased 2bps to 6.13%, the eighth straight weekly drop and the longest stretch of declines since 2018-2019. That helped boost the group’s home-purchase applications index by 1.4% last week to the highest level since early February. The fifth straight weekly advance in the measure points to burgeoning demand in a housing market that’s gradually finding some footing.

SNB

The Swiss National Bank (SNB) cut its key interest rate by 25bps to 1%, a level that the central bank has recently come to regard as neutral. The decision was accompanied by a particularly accommodative message from the central bank, which explicitly stated that further rate cuts may be necessary in the medium term to ensure price stability. Indeed, the central bank’s inflation projections have been revised sharply downwards over the forecast horizon, to an average low of 0.6% in 2025, compared with a low of 1% in 2026 in the previous set of forecasts. The central bank also sees downside risks to the inflation outlook. This is due to the strength of the Swiss franc, which has become a real deflationary force, but also to lower-than-expected domestic inflation.

Other central banks

In Sweden, the Riksbank also cut its key interest rate by 25bps to 3.25% and indicated that further cuts would be made this year if the new macroeconomic projections are confirmed. They even indicated that a 50bps cut was possible at one of the two remaining meetings. The main reason is the new inflation forecasts, which have been revised sharply downwards to below the policy target in 2024-25. The path implicit for the policy rate has also been revised downwards, by 25bps to 2.25%, reached a year earlier. For the Euro area, the question now is if ECB could also cut rates in October, previously unlikely. Sept.’s composite PMI fell by 2.1 points to 48.9, below expectations. The manufacturing sector continued to deteriorate. The pace of expansion in the services sector also slowed sharply. Against this backdrop, a cut will certainly be discussed on 17 October based on these worse-than-expected data. However, the Sept. inflation figures, to be published on 1 October, will be decisive for the Governing Council’s decision.

Highlights

On rates

Sovereign bonds had a decent end to the week thanks to cooler inflation data on both sides of the Atlantic which pushed yields down. On Friday, the 10yr US Treasury yield fell after headline PCE inflation came in at +2.2% y-o-y (vs. +2.3% expected) although was still up +1bp over the week on the back of resilient GDP and labor data. The 2yr yield closed the week at 3.56%. Fed expectations held relatively steady with the market still pricing in 77bps worth of cuts over the final two meetings of the year. In Europe, lower than expected French and Spanish CPI led to growing expectations that the ECB might deliver another cut at their October meeting. Odds of a cut at next month’s meeting rose from 26% to 82%. As a result, 10yr bund yields fell -7.4bps, ending the week at 2.13%. In the corporate space, yields continued to fall given the rally in short-to-to-mid-dated government bonds and tighter credit spreads. High Yield index spread ended the week at 343bps and has tightened recently thanks to lower spreads on the riskiest segment (CCC-rated bonds). The energy sector has been an important underperformer however, as lower oil prices have caused US HY energy sector spreads to widen. Because its weight is important (12% of the ICE BofA US HY index) its contribution to recent spread movement is also significant (+6bps over the last month).

What to watch

• Monday: China Manuf. PMI (Sept.); Germany, Italy flash CPI (Sept.)

• Tuesday: Euro area flash HICP (Sept.); US ISM Manuf. (Sept.), JOLTS survey (Aug.)

• Wednesday: US ADP (Sept.)

• Thursday: US initial jobless claims, ISM services (Sept.), Durable goods orders (Aug.)

• Friday: US Nonfarm payrolls (Sept.)