United States
Stocks had their best performance since November 2022, as a combination of factors led to a surge in the S&P 500 Index. This remarkable weekly gain was attributed to signs of an economic slowdown and a Federal Reserve statement that was seen as accommodating, resulting in a sharp decline in long-term bond yields. While growth stocks and the tech-heavy Nasdaq Composite Index showed some strength, the gains were widespread and were primarily driven by the small-cap Russell 2000 Index, which achieved its most substantial weekly gain since October 2022.
The week was the second busiest of the earnings season, with market activity influenced, in part, by institutional investors making tax-loss recognition trades before the end of their fiscal year on October 31. Index rebalancing and “window dressing” before month-end holdings disclosure likely played a role.
Apart from earnings, the week brought forth a slew of policy statements, economic reports, and geopolitical events for investors to consider. The Federal Reserve’s policy meeting, which concluded on Wednesday, appeared to be a central driver of market sentiment. While the Fed kept interest rates unchanged, as expected, investors were encouraged by the post-meeting statement, which suggested that the recent surge in long-term Treasury yields had achieved the intended tightening of financial conditions. Fed officials also expressed comfort with the stronger-than-expected economic data, slightly modifying their description of economic growth from “solid” to “strong.”
On the job market front, Friday’s closely monitored payrolls report indicated a cooling labour market, with the hope that wage pressures would soon follow. In October, employers added 150,000 jobs, falling below expectations and marking the lowest level since June, with a downward revision to September’s strong gain. Simultaneously, the unemployment rate rose to 3.9%, the highest level since January 2022.
Average hourly earnings increased by 0.2%, below expectations, although September’s gain was revised higher to 0.3%. The 12-month gain dropped to 4.1%, the lowest level in over two years, but still above the level believed to be compatible with the Fed’s inflation target of 2%. The Labor Department’s quarterly employment cost index was pleasantly surprised, showing an annual increase in wages and benefits of 4.3%.
Productivity growth in the quarter exceeded expectations, with unit labour costs declining. The 4.7% increase in productivity marked the best performance since businesses began reopening in the early stages of the pandemic in the third quarter of 2020.
Market sentiment also improved due to the U.S. Treasury’s announcement that it would sell $112 billion of longer-term securities at its quarterly refunding auctions, slightly lower than the original projection of $114 billion. This downward revision alleviated concerns in the bond market about the ability to meet the rising demand for Treasuries necessary to fund the increasing federal debt levels.
All these factors combined to drive a substantial drop in long-term Treasury yields throughout the week, with the yield on the 10-year U.S. Treasury note falling from 4.88% to an intraday low of around 4.48% on Friday, its lowest level since late September. This boost in bond prices positively impacted the municipal bond market and credit-sensitive bond sectors, particularly after the Fed’s announcement on Wednesday. The investment-grade corporate market saw solid demand despite heavy issuance, while the high-yield bond market benefited from both a lack of new issues and the upgrade of Ford’s debt to investment grade, which is set to move it out of the high-yield category.
Europe
The pan-European STOXX Europe 600 Index in local currency bounced back from the prior week’s losses, closing 3.41% higher. Major stock indices also surged, buoyed by the belief that interest rates might have reached their peak. Italy’s FTSE MIB recorded an impressive 5.08% gain, while France’s CAC 40 Index jumped by 3.71%, and Germany’s DAX climbed 3.42%. The UK’s FTSE 100 Index added 1.73%.
Major central banks ‘ expectations of a concluded monetary policy tightening cycle contributed to a broad decline in European bond yields. The 10-year German sovereign bond yield dropped to its lowest point in over two months, and Swiss and French bond yields followed suit. Even the yield on the UK’s 10-year government bond saw a decrease.
Bank of England (BoE) maintains rates at a 15-year high and anticipates a stagnant economy in 2024. The BoE decided to keep interest rates steady at 5.25% for the second consecutive meeting while cautioning that rates would need to remain at a restrictive level for an extended period. BoE Governor Andrew Bailey emphasised that the bank would closely monitor the need for further interest rate hikes and consider rate cuts premature.
The BoE’s latest forecasts indicated a projected halving of the inflation rate by year-end, with the rate expected to fall below the 2% target by the end of 2025, which is a later timeline than previous estimates. The BoE’s economic outlook predicted a mere 0.1% expansion for the remainder of the year, with 2024 expected to see stagnant growth.
Meanwhile, the UK housing market remained weak, with the BoE reporting the lowest level of mortgage approvals since January, at 43,328 in September.
Eurozone experiences a sharp deceleration in inflation and economic contraction; German jobless rate rises. In October, inflation in the eurozone decelerated more than anticipated, reaching an annual rate of 2.9%, the lowest level since July 2021, down from 4.3% in September. Lower energy and food prices were identified as the primary factors driving this decrease. This slowdown likely reflected weakened economic growth within the bloc, with GDP contracting by 0.1% sequentially in the third quarter. Germany, the largest economy in the eurozone, also experienced a similar contraction relative to the second quarter. Additionally, Germany’s Federal Labor Office reported that October’s seasonally adjusted jobless rate rose more than expected to 5.8%, compared to 5.7% in September.
Norges Bank maintains its current interest rates. Norway’s central bank kept its key interest rate unchanged at 4.25%. However, it signalled the likelihood of increasing borrowing costs in December, contingent on the inflation trajectory.
Japan
Japan’s stock markets made gains throughout the week, as the Nikkei 225 Index and the broader TOPIX Index saw returns of approximately 3%. Despite the Bank of Japan (BoJ) adjusting its yield curve control framework, monetary policy remained notably accommodating, supporting market sentiment. However, the BoJ’s dovish stance dampened the yen, causing it to weaken below the 151 level against the U.S. dollar briefly. This depreciation of the Japanese currency can be attributed to the interest rate differential between Japan and the United States.
The BoJ’s monetary policy adjustments were centred on allowing yields to rise more freely, alongside an increase in inflation forecasts:
During the October meeting, the BoJ maintained its commitment to an ultra-loose monetary policy stance, keeping the short-term lending rate at -0.1%. Nevertheless, the central bank changed its second yield curve control framework in three months, permitting yields to rise with more flexibility. It now considers its 1.0% ceiling for 10-year Japanese government bond (JGB) yields as a reference rather than a strict cap on interest rates at that upper boundary. The BoJ did, however, retain the option to announce unscheduled bond purchases or fixed rate operations at its discretion, contingent on global yield trends. Over the week, the JGB yield increased to 0.91% from 0.87%, hovering near its highest level over a decade.
In the BoJ’s Outlook for Economic Activity and Prices, policymakers raised their consumer price index (CPI) forecasts significantly for fiscal years 2023 and 2024, projecting both to reach 2.8% yearly, surpassing the central bank’s 2% target. They emphasised that the outlook for price growth hinges on assumptions related to crude oil prices and government economic measures. They expressed confidence that underlying CPI inflation would gradually move toward achieving the price stability target.
The Japanese government introduced a fresh fiscal stimulus package exceeding USD 110 billion to promote economic growth and alleviate the impact of rising living costs on households. The package encompasses reductions in income and residential taxes in addition to cash assistance for low-income earners. Bolstering economic growth is a fundamental component of this initiative. This announcement coincided with a decline in public support for Prime Minister Fumio Kishida’s administration, with many voters feeling the effects of inflation on their purchasing power.
China
Chinese stocks experienced gains as speculation that U.S. interest rates might have reached their peak offset broader concerns about China’s decelerating economic growth. The Shanghai Composite Index recorded a 0.43% increase, while the blue-chip CSI 300 advanced by 0.61%. In Hong Kong, the benchmark Hang Seng Index added 1.53%, as reported by FactSet.
However, China’s economic indicators told a different story:
In October, China’s official manufacturing Purchasing Managers’ Index (PMI) contracted, dropping to 49.5, lower than expectations and down from September’s 50.2, signifying a slowdown in production growth. The non-manufacturing PMI also fell to a lower-than-expected 50.6 from September’s 51.7. (Readings above 50 indicate expansion.) Furthermore, the private Caixin/S&P Global survey of manufacturing activity declined to 49.5 in October, below forecasts and down from September’s 50.6. The private survey of services activity showed a slight improvement but still fell short of consensus estimates.
Investor concerns deepened due to additional evidence of China’s property market downturn, which is a crucial driver of the country’s economy. According to the China Real Estate Information Corp, new home sales by China’s top 100 developers dropped by 27.5% in October compared to the previous year, a slight improvement from the 29.2% decline in September. Moreover, the central bank reported that real estate loans decreased to RMB 53.19 trillion in September compared to the same period the previous year, marking the first year-on-year decline since data became available in 2005.
Despite recent signs of a demand rebound following Beijing’s stimulus measures, China’s ongoing housing market decline weighs heavily on the country’s growth outlook for many investors. While China is expected to achieve its 5% gross domestic product (GDP) growth target in 2023, concerns persist, driven by perceived insufficient government support for the housing sector. S&P Global Ratings suggests that under a bear case scenario, China’s GDP growth could slow to as low as 2.9% next year, with property sales potentially falling by as much as 25% from 2022.
Market Indices
|
|
Weekly Index |
|
YTD Index |
|
|
Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
1.63 % |
1.63% |
3.21% |
3.21% |
|
US |
|
|
|
|
|
S&P 500 Index |
4.61 % |
2.77 % |
14.58% |
11.40% |
|
Nasdaq |
5.34% |
3.48 % |
38.98% |
35.11% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
3.70 % |
2.97 % |
12.71% |
10.20% |
|
Asia |
|
|
|
|
|
Nikkei 225 Index |
4.08% |
2.92% |
21.54% |
5.31% |
|
MSCI Emerging Markets Index |
2.07% |
1.07% |
3.11 % |
-1.40% |
More news
-
Markets last week – 19/04/2024
USA Stocks continued their retreat from recent highs as geopolitical tensions and concerns about interest rates weighed on investor sentiment. Mega-cap technology shares faced pressure due to rising rates, exacerbated by a revenue miss from ASML Holdings. Small-cap stocks struggled, pushing the Russell 2000 Index further into negative territory. The trading week began with optimism
April 22, 2024 -
Markets last week – 12/04/2024
USA Equity markets retreated amid fears of Middle East conflict and persistent inflation pressures, pushing Treasury yields higher. Large-caps fared better than small-caps, with growth stocks outperforming value shares which were weighed down by interest rate-sensitive sectors, such as real estate investment trusts (REITs), regional banks, housing, and utilities. Wednesday’s CPI data showed prices rising
April 17, 2024 -
Markets last week – 05/04/2024
USA In the U.S., stocks retreated from record highs as U.S. Treasury yields surged, driven by indications of a manufacturing revival. Major indexes, particularly large-cap ones, pulled back, with growth stocks outperforming their value counterparts. Energy stocks notably surged, fueled by rising tensions between Israel and Iran and concerns over oil supply disruptions. Additionally, Microsoft’s
April 10, 2024 -
UK Tax rates 24/25
UK TAX RATES 24/25 The tax year starts today, the 6th of April and will end on April 5th of next year. It’s important to note that tax rates, limits, and allowances can change from year to year, affecting the amount people pay in taxes. To help you prepare, here’s a convenient overview of the
April 6, 2024
About Author
