2024 Weekly Update

Market update

The S&P 500 closed the week at 5,751.07, +0.22% higher. The Dow Jones closed at 42,352.75, +0.09%, with the Nasdaq higher by +0.10%. The volatility index VIX closed the week at 19.21, up from 16.96. The Euro Stoxx 600 fell -1.80%.

The 10-year UST closed at 3.97%, up from 3.75% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -66bps. US Corporate Bond spreads: Investment Grade spreads narrowed -2bps at 166bps and High Yield spreads narrowed -4bps at 339bps. German 10-year Bunds yield closed at +2.21% up from+2.13% a week before. In Europe, Corporate Investment Grade spreads narrowed -1bp at 127bps and High Yield widened +4bps at 370bps.

The US Dollar Index (DXY) appreciated +2.13% last week and closed at 102.52. The Euro closed at 1.0974 (-1.68%); the Yen depreciated -4.56%, closing at 148.7 and the Swiss Franc depreciated -2.12%, closing at 0.8584. Gold closed at $2653.6, depreciating -0.17%. Oil was higher, Brent closed at $78.05 (+8.43%) and WTI at $74.38 (+9.09%).

Macroeconomy

Jobs report

The US economy created 254k jobs in Sept. according to the Establishment survey, a very robust number that exceeded the forecast of +150k. Employment continued to trend up in food services and drinking places, health care, government, social assistance, and construction. Employment in food services and drinking places rose by 69k (above the average monthly gain of 14k over the prior 12 months). Establishment survey revisions were positive with July and Aug. payrolls revised up by 72k. The Household survey was even stronger than the Establishment, showing that the number of employed people shot up 430k in Sept. The unemployment rate ticked lower to 4.1%, down from 4.2% in Aug, while the participation rate held steady at 62.7%. Hourly wage growth rose +0.4% m-o-m (vs. consensus at +0.3%) and +4% y-o-y (vs. consensus at +3.8%). However, the workweek ticked down to 34.2 hours, vs. expectations for 34.3 hours. Weekly compensation rose just +3.3%.

Fedspeak

The week begun with comments from Fed Chair Powell. While maintaining data-dependence, he emphasized that the economy remains solid, noting that “this is not a committee that feels like it’s in a hurry to cut rates quickly”. He also reiterated the rates signal from the most recent Economic Projections, saying that “if the economy performs as expected that would mean two more cuts this year, for a total of 50bps more”. So some conditional pushback relative to market expectations that had moved to fully price 75bps of further cuts by year-end. It was a busy week in terms of Fedspeak. Fed Governor Bowman repeated her preference for slower easing. Atlanta's Bostic said he's open to a 50bps move should the labor market weaken. Fed Barkin noted that while progress has been made, “It remains difficult to say that the inflation battle has yet been won”. After Friday Jobs report, Chicago's Goolsbee voiced some optimism about the prospects of an economy with inflation at around the 2% target and unemployment at 4-4.5%.

US data

On the employment front, ADP private payrolls report came in at +143k in Sept. (vs. +125k expected) and ended a run of 5 consecutive months with ADP slowing down. Aug. job openings were stronger than expected at 8.040m (vs. 7.693m expected), but the other details in the report generally pointed in a more negative direction. For instance, the quits rate of those voluntarily leaving their job was down to 1.9%, the lowest since June 2020 -below pre-Covid levels. The hires rate also fell back a tenth to 3.3%, in line with its joint-lowest since the Covid-19 pandemic. Sept. ISM services index came in at a 19-month high of 54.9 (vs. 51.7 expected), above estimates. The new orders component also surged to a 19-month high of 59.4. Sept. ISM manufacturing remained at 47.2 (vs. 47.5 expected) with the employment component weakening to 43.9.

Europe data

Aug. unemployment rate remained at 6.4%, in line with expectations, still at its lowest level since the single currency’s formation. Sept. Euro Area inflation fell beneath the ECB’s 2% target for the first time since June 2021. Specifically, headline CPI was down to +1.8% y-o-y. Core CPI was a little stronger at +2.7%, in line with expectations. German inflation was down to +1.8% in Sept. as expected. That’s the first sub-2% reading since February 2021. The Italian data showed inflation down to just +0.8%. After the inflation data, ECB President Lagarde kept the door open to an Oct. cut. She said that “inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates, but the latest developments strengthen our confidence that inflation will return to target in a timely manner. We will take that into account in our next monetary policy meeting in October”. Lastly, in France PM Michel Barnier delivered his first speech to lawmakers. France would be delaying its target to get the budget deficit beneath 3% of GDP from 2027 to 2029, and that they’d aim to cut the deficit to 5% of GDP next year, subject to Parliament approval.

China tariffs

EU member states voted to impose tariffs on Chinese electric vehicles (EV). EU members were divided on tariffs. Many EU members abstained in the vote. German carmakers have been vocal in opposition. Volkswagen says tariffs are "the wrong approach". Tariffs are set to rise from 10% to up to 45% for the next five years, but there have been concerns such a move could raise EV prices for buyers. The charges were calculated based on estimates of how much Chinese state aid each manufacturer has received. The EU set individual duties on three major Chinese EV brands - SAIC, BYD and Geely.

Highlights

Q3 earnings

Friday will mark the start of the Q3 earnings season with several US banks releasing results. Samsung, PepsiCo and BlackRock also report throughout the week. In the US, analysts have steadily lowered their estimates for S&P 500 profit growth for the upcoming Q3 earnings season. The latest projection calls for 4.7% growth, down from as high as 8% back in July, according to Bloomberg Intelligence data. If realized, that would mark a significant deceleration from the 11% average quarterly pace in the first half of the year. In Europe, EPS consensus for the Euro Stoxx 50 has been cut 3.3% over the past three months as lower oil prices and profit warnings from all auto makers (except Ferrari) have led to significant earnings downgrades in the energy and consumer discretionary sectors (11% and 15%, respectively). Excluding just autos and energy companies (which accounted for more than 20% of Euro Stoxx 50 earnings in the first half), the 2024 EPS forecast for the rest of the benchmark would be broadly flat. China stimulus isn’t expected to boost earnings for the next 6-12 months.

On rates

The main impact from the jobs report is that fears of a recession continued to decline. Markets had been pricing in 34bps of cuts for the Fed’s Nov. meeting prior to the release, so a 35% likelihood of a 50bps cut, but that fell to just 25bps by the close on Friday and effectively wiping out the pricing of 50bps. An entire rate cut was taken out of the 2025 profile, with the rate priced in by Dec. 2025 moving up +26bps on Friday alone. With a recession being priced out, that led to a massive sell-off in US Treasuries, with the 2yr yield up +21.8bps on Friday and +36.4bps over the week, closing at 3.92%. That made it the biggest weekly gain for the 2yr yield since June 2022. The 10yr yield was up +21.6bps over the week, and +12.1bps on Friday, taking it up to 3.97%, its highest level since early August. In Europe, the 10yr bund yield ended the week up +7.7bps (+6.6bps Friday) at 2.21%, even as investors grew more confident that the ECB would cut rates at their October meeting. During the week, we heard from Schnabel, one of the most prominent hawkish ECB voices in recent years, who said that “we cannot ignore the headwinds to growth” and that “a sustainable fall of inflation back to our 2% target in a timely manner is becoming more likely, despite still elevated services inflation and strong wage growth”.

What to watch

• Monday: Germany Factory Orders (Aug.)
• Tuesday: Japan Labor cash earnings (Aug.); Germany Ind. Production (Aug.); US Trade Balance (Aug.)
• Wednesday: US FOMC Meeting Minutes (Sept. 18)
• Thursday: Japan PPI (Sept.); US CPI (Sept.); Germany CPI (Sept. F); UK GDP (Aug.)
• Friday: US Univ. of Michigan Survey (Oct.)