2024 Weekly Update

Market update

The S&P 500 closed the week at 5,864.67, +0.85% higher. The Dow Jones closed at 43,275.91, +0.96%, with the Nasdaq higher by +0.80%. The volatility index VIX closed the week at 18.03, down from 20.46. The Euro Stoxx 600 rose +0.58%. 

The 10-year UST closed at 4.08%, down from 4.10% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -56 bps. US Corporate Bond spreads: Investment Grade spreads narrowed -3 bps at 157 bps and High Yield spreads narrowed -7 bps at 325 bps. German 10-year Bunds yield closed at +2.18% down from+2.27% a week before. In Europe, Corporate Investment Grade spreads narrowed -3 bps at 118 bps and High Yield narrowed -3 bps at 357 bps. 

The US Dollar Index (DXY) appreciated +0.59% last week and closed at 103.49. The Euro closed at 1.0867 (-0.64%); the Yen depreciated -0.27%, closing at 149.53 and the Swiss Franc depreciated -0.89%, closing at 0.8648. Gold closed at $2,721.46, appreciating +2.44%. Oil was lower, Brent closed at $73.06 (-7.57%) and WTI at $69.22 (-8.39%).

Macroeconomy

ECB

The ECB decided to cut its deposit facility rate by 25 bps to 3.25% with President Christine Lagarde stating that the decision was unanimous. The wording in the press statement was broadly unchanged. In particular, the sentence about the need to keep monetary policy “sufficiently restrictive” was left unchanged. Lagarde mentioned that the balance of risks to growth was tilted to the downside, but that she was a bit more nuanced about inflation. As expected, the ECB remained cautious and provided little guidance on the next steps, with Lagarde emphasizing that the ECB will remain “data dependent and follow a meeting-by-meeting approach.” Today’s decision to cut by 25bps was mentioned as “proof” of ECB’s data dependency. Importantly, while she did not commit to anything, Lagarde did not close the door to faster rate cuts and emphasized the importance of staff projections and the next data releases in the coming weeks. In all, the focus in December will be on the revision of the staff projections.

US data

Upbeat economic data continued to dampen fears about a potential recession. Weekly initial jobless claims for the week ending October 12 fell to 241k (vs. 259k expected), coming off their recent high of 260k. Continuing claims ticked up to 1.867M (vs. 1.858M in the prior week and vs. the Street forecast of 1.865MM). In addition, retail sales data also surprised on the upside with growth of +0.4% in September (vs. +0.3% expected) and the control group +0.7% (vs. the Street +0.3%). Areas of strength included food & beverage stores/grocery stores (+1% m-o-m), health & personal care stores (+1.1%), clothing & clothing accessories (+1.5%), miscellaneous store retailers (+4%), and food services & drinking places (+1%). Areas of weakness included furniture (-1.4%), electronics/appliances (-3.3%), and gas stations (-1.6%).

UK data

UK inflation for September surprised to the downside. Headline inflation was below target at 1.7% y-o-y, down from 2.2%, as the negative growth in energy was more pronounced than anticipated. Core CPI eased by 0.4%, reaching 3.2% y-o-y. The biggest surprise came from services CPI, which dropped to 4.9% from 5.6% in August, following months of stickiness. Although part of this decline was due to volatile/seasonal components (i.e., transportation and accommodation), on a seasonally adjusted basis, the sequential growth was the weakest compared to historical averages. This suggests that underlying inflationary pressures are indeed receding.

China

Q3 GDP and September hard data all surprised on the upside. Specifically, Q3 GDP accelerated to around 4% q-o-q annualized from 2% in Q2 (Q2 number was revised downward from around 3%). The acceleration was primarily driven by the rebound in the industrial sector although services also improved slightly. On the expenditure side, organic drivers continue to be weak as consumption momentum slowed during the quarter while housing investment continued to contract. Exports momentum moderated as well with a contraction of around 2% in Q3 vs -0.8% in Q2. However, public demand including infrastructure investment and manufacturing investment rebounded significantly in Q3. In the housing sector, sales were flat in September and contracted by around 3% in Q3 vs 8% in Q2. Daily sales data in October is suggesting some improvement following government intervention, but it may still take time for the housing sector to stabilize.

Highlights

Q3 earnings

Q3 earnings season is heating up with nearly 60% of the S&P500 market cap scheduled to report in the next two weeks. Investors are not projecting any sequential improvement in earnings and Q3 EPS growth projections have been meaningfully downgraded in the last months, from 8% y-o-y to 4% y-o-y growth rate currently. These downgrades are more aggressive than what is typically seen in the runup to past reporting seasons. Last week, notable reports came from P&G, UNH, JNJ and AMEX which reported EPS upside. SLB reported EPS in line with expectations while CVS earnings and guidance fell short. Looking ahead, the main highlights this week will be SAP, GE, GM, Tesla, IBM, and Boeing. Over in Europe, around 50% of companies will be reporting in the next two weeks. The hurdle rate is even lower there, where Q3 EPS growth projections are at -2% y-o-y, down from 4% a few months ago. ASML and LVMH were the big stories last week. ASML posted weak bookings and 2025 guidance below expectations. LVMH also disappointed, reporting a shortfall on Q3 revenue and missing estimates in all business lines.

On rates

There was a modest rally in sovereign bonds. Yields on 10yr US Treasuries closed the week at 4.08%, down -1.7bps, despite having risen earlier during the week on the back of strong economic data. Fed expectations held approximately steady, with the market pricing in 44bp worth of rate cuts over the year’s final two meetings. Yields on 10yr bunds came down by a larger -8.3bps to 2.18%, helped by the back-to-back cut by the ECB. During the week, US IG credit spreads fell to just 79bps, their tightest level since 2005 during the week. Similarly, Euro IG credit spreads ended the week at just 118bps, their tightest since February 2022. That spread tightening also happened among sovereign bonds, with the gap between the 10yr Italian yield over bunds down -11.9bps last week to 118bps, which is their tightest level since November 2021.

What to watch

• Monday: China: PBoC interest rate decision

• Tuesday: US: Richmond Fed manufacturing (Oct)

• Wednesday: US: existing home sales (Sep); EU: consumer confidence (Oct); Canada: BoC interest rate decision

• Thursday:  US: PMIs (Oct), Initial jobless claims; EU: PMIs (Oct); UK: PMIs (Oct); JP: Tokyo CPI (Oct)

• Friday: US: durable goods orders (Sep)