2024 Weekly Update

Market update

The S&P 500 closed the week at 5,870.62, -2.08% lower. The Dow Jones closed at 43,444.99, -1.24%, with the Nasdaq lower by -3.15%. The volatility index VIX closed the week at 16.14, up from 14.94. The Euro Stoxx 600 fell -0.69%.

The 10-year UST closed at 4.44%, up from 4.30% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -7 bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 156bps and High Yield spreads narrowed -15bps at 292bps. German 10-year Bunds yield closed at 2.35% down from 2.37% a week before. In Europe, Corporate Investment Grade spreads narrowed -1 bp at 112bps and High Yield widened +4bps at 347bps.

The US Dollar Index (DXY) appreciated +1.61% last week and closed at 106.69. The Euro closed at 1.054 (-1.66%); the Yen depreciated -1.09%, closing at 154.3 and the Swiss Franc depreciated -1.37%, closing at 0.8876. Gold closed at $2,563.25, depreciating -4.53%. Oil was lower, Brent closed at $71.04 (-3.83%) and WTI at $67.02 (-4.77%).

Macroeconomy

US inflation

Oct. CPI was right in line on both headline (+0.2% m-o-m and +2.6% y-o-y) and core (+0.3% m-o-m and +3.3% y-o-y). Core services (services ex-energy) came in at +0.3% m-o-m, a downtick from +0.4% in the prior two months. Rent/shelter is still running hot (shelter came in +0.4%, an acceleration from +0.2% in the prior month), but there was a slowdown in medical care services (+0.4% vs. +0.7% in the prior month) and transportation services (+0.4% m-o-m vs. +1.4% in the prior month). Powell and his colleagues largely believe the shelter component of the CPI overstates actual conditions, with current rents much cooler than what the data is capturing. Regarding PPI, it showed inflation remaining stubbornly above levels consistent with the Fed’s target. For instance, the core PPI reading was at +0.3% m-o-m (vs. +0.2% expected), which pushed up the y-o-y measure to +3.1% (vs. +3.0% expected). Moreover, that comes on the back of core CPI staying at +0.3% for a third month running, so the concern is that inflation is getting stuck at those levels. The Fed officially targets the PCE measure of inflation and we’ll get the PCE numbers on Nov. 27.

Fedspeak

We heard from Fed chair Powell who explicitly said that the economy “is not sending any signals that we need to be in a hurry to lower rates”, and that its strength “gives us the ability to approach our decisions carefully”. It was a much more hawkish message from Powell relative to his Jackson Hole speech in August, where he said that the “time has come for policy to adjust”. He also noted that yesterday’s PPI data was stronger than the Fed had penciled in, seeing the data as consistent with a +2.8% y-o-y core PCE print. Also, Minneapolis Fed President Kashkari said that “I think that inflation is headed in the right direction”, and Dallas Fed President Logan said that “I think it behooves us to proceed cautiously at this point”. This tone of heightened uncertainty was echoed by Kansas City Fed President Schmid, who said that “it remains to be seen how much further interest rates will decline or where they might eventually settle”, while St Louis Fed President Musalem commented that officials should assess incoming data “judiciously and patiently”. Earlier in the week and again from Minneapolis Fed’s Kashkari, one of the more hawkish FOMC voices, who suggested a still reasonably high bar for the Fed to pause next month, saying that “there’d have to be a surprise on the inflation front to change the outlook so dramatically”.

Economic data

In the US, the Fed’s quarterly Senior Loan Officer Survey (SLOOS) showed bank credit conditions staying at around neutral levels. It showed further normalization of credit standards for CRE lending, while banks’ willingness to make consumer loans turned positive for the first time in two years. It also showed a decline in demand for C&I (Commercial & Industrial) lending and a tightening in mortgage standards. The US NFIB’s small business optimism index rose to 93.7 in Oct. (vs. 92.0 expected). In Europe, the German ZEW survey came in beneath expectations, with the current situation down to -91.4 in Nov. (vs. -85.0 expected). That’s the lowest reading since May 2020 during the Covid-19 pandemic. Moreover, the expectations component fell back to 7.4 (vs. 13.2 expected).

German elections

The political parties agreed to hold an early federal election on February 23. So, Chancellor Scholz will table a confidence vote on December 16, and once that’s lost the President is able to hold early elections. That’s a change from the timetable that had previously been proposed, which was for a confidence vote on January 15, and then elections in March. As it stands, opinion polls have consistently placed the center-right CDU/CSU group in the lead, with Politico’s polling average putting them on 32%. They’re followed by the far-right AfD on 17%, Chancellor Scholz’s center-left SPD on 16%, the Greens on 10%, and the new far-left group BSW on 8%. Then behind them are the FDP on 4%, and the Left on 3%, both of whom are beneath the 5% hurdle required to enter the Bundestag.

Asia data

In China, retail sales came in at +4.8% y-o-y in Oct. (vs. +3.8% expected). However, industrial production was weaker than expected at +5.3% y-o-y (vs. +5.6% expected). In Japan, Q3 GDP data was a bit faster than expected with an annualized quarterly gain of +0.9% (vs. +0.7% expected). Q2 growth was revised down to an annualized pace of +2.2% (vs. +2.9% previously). Also, the producer price index (PPI) rose +3.4% from the same month last year (vs. +2.9% expected) as a spike in rice costs pushed up overall wholesale inflation. That compares to an upwardly revised +3.1% increase in September. In Australia, unemployment rate remained steady at 4.1% for the third consecutive month in Oct. as the number of employed people increased by 15,900. Economists had believed employers would add a net 25,000 jobs in Oct. Meanwhile, there is a slight drop in the participation rate from a record 67.2%, edging down to 67.1% in Oct..

Highlights

Q3 earnings

With over 90% of S&P companies having released their results, the US earnings season is entering its final stage. So far, 76% of companies beat EPS expectations, surprising positively by 5%. Earnings growth is coming in at +6% y-o-y. Cyclical sectors (Energy, Materials, and Industrials) are seeing negative earnings growth while Healthcare, Communication Services and Utilities have reported double-digit EPS growth. On the revenue side, 53% of companies are surprising positively and revenue growth is coming at +5% y-o-y. Again, cyclical sectors are underperforming with sales that are flat or down on a y-o-y basis. Throughout the Q3 earnings season, 2024 EPS have been revised higher and 2025 EPS estimates have now stabilized after rising in recent weeks. Nvidia is reporting on Wednesday after the bell. Expectations are for $34.6bn in sales, $2b ahead of the guide, and EPS of $0.74. Other major releases include Medtronic, Walmart, Palo Alto, Target, and TJX. In Europe, 87% of Stoxx600 companies have released results. 62% of companies surpassed EPS estimates, surprising positively by 2%. EPS growth is coming in at -2% y-o-y. Energy, Materials, Consumer discretionary, Staples and Technology are recording negative EPS growth, while Industrials, Healthcare, Utilities and Communication Services are printing double-digit earnings growth. On the revenue side, 41% of companies are beating expectations. Overall, top line growth is flat and coming in negative in 4 out of 11 sectors.

What to watch

• Monday: no major events
• Tuesday: EU CPI final (Oct.); US building permits and housing starts (Oct.)
• Wednesday: PBoC interest rate decision; UK CPI (Oct.)
• Thursday: US PMIs (Nov.), Initial jobless claims; EU consumer confidence; UK PMIs (Nov.)
• Friday: EU PMIs (Nov.)