2024 Weekly Update

Market update

The S&P 500 closed the week at 5,815.03, +1.11% higher. The Dow Jones closed at 42,863.86, +1.21%, with the Nasdaq higher by +1.13%. The volatility index VIX closed the week at 20.46, up from 19.21. The Euro Stoxx 600 rose +0.66%.

The 10-year UST closed at 4.1%, up from 3.97% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -54 bps. US Corporate Bond spreads: Investment Grade spreads narrowed -6 bps at 160bps and High Yield spreads narrowed -7 bps at 332bps. German 10-year Bunds yield closed at +2.27% up from +2.21% a week before. In Europe, Corporate Investment Grade spreads narrowed -5 bps at 122bps and High Yield narrowed -10 bps at 360bps.

The US Dollar Index (DXY) appreciated +0.36% last week and closed at 102.89. The Euro closed at 1.0937 (-0.34%); the Yen depreciated -0.29%, closing at 149.13 and the Swiss Franc appreciated +0.14%, closing at 0.8572. Gold closed at $2,656.59, appreciating +0.11%. Oil was higher, Brent closed at $79.04 (+1.27%) and WTI at $75.56 (+1.59%).

Macroeconomy

Inflation

Sept. CPI came in above expectations, with the headline rising +0.2% m-o-m (vs. expectations at +0.1%) and +0.3% core (vs. expectations at +0.2%). On a y-o-y basis, headline came in at +2.4% (down 10bps from +2.5% in Aug., but ahead of expectations at +2.3%) with core at +3.3% (up 10bps from +3.2% in Aug. and ahead of expectations at +3.2%). It also meant the 3-month annualized rate for core CPI rose to +3.1%, having been at +2.1% in August. Food prices accelerated to +0.4% m-o-m (up from +0.1% in Aug.) while energy sank 1.9% m-o-m (vs. -0.8% in Aug.). Within the core categories, hot areas included apparel (+1.1% m-o-m vs. +0.3% in Aug), used cars (+0.3% vs. -1%), medical care services (+0.7% vs. -0.1%), motor vehicle maintenance/repair (+1% vs. +0.6%), motor vehicle insurance (+1.2% vs. +0.6%), and airline fares (+3.2% vs. +3.9%). Shelter cooled to +0.2% m-o-m (vs. +0.5% in Aug), with Owners’ Equivalent Rent +0.3% (vs. +0.5%).

Fedspeak

The FOMC minutes from the Sept. meeting, where the Fed delivered their recent 50bps rate cut, said that “some participants observed that they would have preferred a 25bps” cut and “a few others indicated that they could have supported such a decision”. Also, It was a busy week for Fedspeak. Atlanta's Bostic told Nick Timiraos from WSJ that choppy recent data may merit a pause in November. Chicago's Goolsbee noted inflation clearly going down, though more data to come. Richmond's Barkin said he is increasingly confident inflation is headed in the right direction. NY's Williams reiterated rates will move to neutral "over time". SF's Daly said 1-2 cuts this year likely if economy evolves as expected. Before the CPI publication, Dallas Fed's Logan (non-voter) said more gradual path is more appropriate, cautioned inflation could get stuck above 2% target. Boston's Collins (non-voter) stressed data dependence, though also preserving current favorable economic conditions. Vice Chair Jefferson again today said labor market noticeably cooling, but Fed to take decisions meeting-by-meeting. Atlanta's Bostic argued that labor market has slowed but is not weak; added inflation still quite a ways above the 2% target. NY's Williams stressed Fed cuts should come "over time." Governor Kugler said focus should remain on inflation fight, though said she strongly supported Fed's 50bps cut and is watching for signs of labor-market cooling. Overnight, St. Louis's Musalem advocated patience, saying he is more concerned about easing too much too soon than moving too late. Lastly, Kashkari said he has confidence in inflation moving back to target, though balance of risks shifting more toward higher unemployment. On Thursday, weekly claims spiked, with initials at 258k (up from 225k and ahead of expectations at +230k) and continuing at 1.861M (up from 1.819M and ahead of the 1.83M consensus).

China stimulus

The Chinese Ministry of Finance (MOF) held a conference on Saturday on the recent stimulus measures. Before the press conference, market expectations were high, hoping for significant demand side stimulus, especially for households consumption. MOF within their authority tried to not disappoint the market, with strong language (e.g., “relatively large scale”) and forward guidance (e.g., still relatively large room for central govt. to increase debt and deficit). On the flip side, MOF did not provide explicit numbers that certainly the market would have wanted to hear as the key numbers cannot be disclosed before the approval at the National People’s Congress to be held in late Oct. In terms of new policy measures, instead of focusing on directly stimulating demand this year, the major focus is on fiscal sustainability, for instance increasing the debt ceiling on a relatively large scale to swap outstanding local government implicit debts. MOF mentioned: “it will be the strongest debt alleviation measure introduced in recent years”, it could be at least RMB 2tr based on recent years’ numbers. Another two new policy measures were introduced: issuing central govt. special bonds to support large banks in replenishing core capital and supporting housing sector through local govt. special bonds (uncertain how much could be allocated to these purposes). Regarding support for demand in coming months this year, MOF press conference seemed to suggest priority is to accelerate utilization of what has been in pipeline. For instance, there remains around rmb 2.4tr of local govt. special bonds to be deployed. And there remains around 1tr of central govt. bonds to be issued. They could also use accumulated fiscal deposits as mentioned by MOF.

Highlights

Q3 earnings

The bar is low for US Q3 earnings season as consensus expects just 4% earnings growth for the S&P500 (vs. 11% growth in Q2). The bulk of the growth continues to come from big-tech with the Magnificent 7 expected to post an 18% rise in profits in Q3. For the other 493 companies, profits are expected to climb 1.8% (vs. 9.1% in Q2). Sector wise, three of the 11 S&P sectors – technology, communication services and health care – are expected to post profit expansions of more than 10%. The energy group, on the other hand, is expected to report a decline of more than 20%. Despite these low expectations, large US banks kicked off the earnings season with solid numbers. JPM reported EPS upside at 4.37 (vs. expectations of 4.01), with the beat driven by higher net interest income and fee income as well as expense discipline. Wells Fargo posted EPS of 1.42 (vs. 1.28 expected) driven by lower expenses and provisions, and a lower tax rate. Blackrock also reported strong EPS upside and highlighted record quarterly revenues and strong long-term net inflows. Outside of financials, Fastenal reported earnings in line with consensus as slightly better sales and a lower tax rate helped offset margin pressure. Looking ahead, the focus for this week will be on earnings reports from 44 of S&P 500 members which account for approximately 9% of the index. US bank results will continue to come in with Bank of America, Citigroup, Morgan Stanley and Goldman Sachs alongside large cap healthcare names including UnitedHealth and Johnson & Johnson. Other notable names include Netflix, SLB, and Procter & Gamble. Outside of the US, major releases include LVMH, ASML and Nestle.

On rates

It was a volatile week for sovereign yields as hotter-than-expected CPI coupled with higher jobless claims continued to put the Fed's easing pace in the spotlight. The weak labor market data led investors to increase the pricing of Fed rate cuts in the coming months, even as they priced in more inflation for the years ahead. This contributed to a rally in front-end yields that pushed the 2yr Treasury yield down -6.5bps to 3.96%. 46bps of cuts are now priced in over the final two meetings of the year. Meanwhile, the long-end sold off as a result of the conflicting data and yields on 10yr Treasuries ended the week at 4.10%, up +13.3bps. Rates were also higher over in Europe with yields on 10yr bunds rising +5.6bps to 2.27%.

What to watch

• Monday: China Trade Balance (Sept.)
• Tuesday: Germany ZEW Survey (Oct.); US Empire Manufacturing (Oct.)
• Wednesday: UK CPI (Sept.)
• Thursday: ECB Meeting; US Retail Sales (Sept.), Industrial Production (Sept.)
• Friday: Japan CPI (Sept.); China GDP (3Q), Industrial Production (Sept.), Retail Sales (Sept.); UK Retail Sales (Sept.); US Housing Starts (Sept.), Building Permits (Sept.)