Summary of the week - 11 Oct 24

Interest rate

• US: At the moment, the US interest rate is between 4.75-5%. According to CME's FedWatch Tool, there is an 87.3% probability that the Fed will implement a 25-basis-point rate cut at its November meeting, while the market assigns a 12.7% chance that rates will remain unchanged. Last week, the market had fully priced in at least a 25-basis-point cut, with a 36.8% chance of a larger 50-basis-point reduction.

• UK: BoE kept the interest rate steady at 5% during its September 2024 meeting, after a 25-basis-point cut in August, the first rate reduction in over four years. In the first week of October, the Bank indicated it could reduce rates more quickly if inflation remains under control. With inflation now close to the Bank’s 2% target, attention has shifted to how many rate cuts might follow. However, Governor Andrew Bailey cautioned that BoE is closely monitoring developments in the Middle East, particularly any fluctuations in oil prices that could drive inflation higher.

• EU: ECB cut the interest rate by 25 basis points to 3.5% in September, following a similar reduction in June. The ECB is expected to lower the rate by another 0.25 percentage points to 3.25% on October 17th, as suggested by recent comments from several council members, including ECB President Christine Lagarde and French central bank chief François Villeroy de Galhau. However, the idea of a rate cut next week is relatively new, and some economists are skeptical, believing the ECB may wait until the December meeting to make the next move.

  
  

Inflation rate

• US: In September, the Consumer Price Index (CPI) rose by 0.2% from the previous month, marking the third consecutive month of 0.2% growth. Core inflation increased to 3.3%, a slight rise from the 3.2% recorded in the previous two months, matching the 3.3% rise seen in June.

• UK: The UK's inflation rate is anticipated to have declined when the Office for National Statistics releases fresh figures for September next Wednesday. "Core" inflation, which excludes the more volatile food and energy prices, is projected to have fallen to 3.5% in September, down slightly from 3.6% in August. According to FactSet's consensus, the headline CPI is forecast to have edged down to 2.1%, from 2.2% in August. While this brings inflation closer to the Bank of England's 2% target, it remains slightly above the desired level.

• EU: Inflation in Europe dropped to 1.8% in September, the lowest level in over three years and below the European Central Bank's 2% target. Although core inflation remains higher, its consistent downward trend is a positive sign for the region's economic outlook.

  
  

  

  
  

Equity market

• US: US Equity market closed at 5,815.03, up 77.23 points or 1.35% over the past five days. The chart shows steady gains throughout the week, with the index reaching a high of 5,822.13. This performance indicates strong market confidence, potentially fuelled by positive economic data or expectations of further monetary easing by central banks.

• On Monday, stocks stumbled due to growing concerns about an escalating conflict in the Middle East and a solid U.S. payrolls report, which caused a reassessment of the potential size and pace of future Federal Reserve interest rate cuts.

• By Tuesday, markets rallied ahead of key inflation data and the start of the corporate earnings season, set to kick off at the end of the week with banks leading the charge. U.S. stocks closed sharply higher, with the S&P 500 bouncing back from a nearly 1% decline the previous day. Technology stocks surged more than 2%, providing crucial support to the market.

• On Friday, the S&P 500 edged up 0.1%, while the Dow Jones gained about 210 points. However, the Nasdaq slipped 0.4% as traders digested the latest Producer Price Index (PPI) report and turned their focus to corporate earnings. Producer prices remained flat in September, beating expectations of a 0.1% rise, and the core rate eased to 0.2% from 0.3%. Despite these positive monthly figures, the annual PPI rates were higher than anticipated.

• The Q3 earnings season kicked off, with JPMorgan shares rising over 3% after beating both earnings and revenue estimates. Wells Fargo surged 5.5% despite missing forecasts, while Bank of New York Mellon added 0.4%, also exceeding expectations. BlackRock gained 1.5% as its assets under management reached a record high. Conversely, Tesla tumbled nearly 10% to a four-week low of $218.81 after its Cybercab concept vehicle failed to impress investors.

For the week, the S&P 500 ended up 0.5%, the Dow Jones rose 0.2%, and the Nasdaq gained 0.8%.

• UK: The UK Equity market closed at 8,253.65, down 0.33% for the week, reflecting a 26.7 point decline. The index showed some volatility, peaking at 8,280.63 on Monday, October 7th, before trending downward and stabilizing towards the end of the week, reaching a low of 8,211.92.

• One of the factors contributing to the midweek dip was several companies trading ex-dividend on Thursday. When a company goes ex-dividend, its stock price typically drops by the amount of the dividend being paid, as new buyers after this date are not entitled to the dividend. With multiple major companies going ex-dividend at the same time, this temporarily pushed the broader market down.

• By Friday, the FTSE 100 climbed back, ending the day 0.2% higher, helped by positive economic data showing that the UK economy returned to growth in August after two stagnant months. The Office for National Statistics reported growth, drawing attention to the upcoming October 30 Budget, which is expected to shape economic policy for the months ahead. This helped lift sentiment across markets, with both UK and European stocks up by the close.

• However, despite Friday’s recovery, the FTSE 100 still recorded a 0.3% decline for the week, while the FTSE 250 midcap index, which is often more sensitive to domestic UK economic conditions, fell around 1% for the week. This suggests that while blue-chip stocks remained relatively stable, mid-sized companies were more impacted by the ongoing market uncertainties.

Despite the dip, the UK Equity market remains well above its 52-week low, indicating underlying market resilience.

• EU: The EU Equity market closed at 521.98, up 0.55% over the past five days, with a gain of 2.86 points. Despite some fluctuations throughout the week, the index ended on a strong note, just shy of its 52-week high of 528.68. European stocks rebounded on Wednesday, bouncing back from losses in the previous session, as investors turned their attention to anticipated interest rate cuts and the upcoming U.S. inflation report.

• On Wednesday, the STOXX 600 rose 0.6%, with the automobiles and parts sector leading gains, up 1.1%, marking a strong recovery for a sector that had lagged most of the year. However, by Friday, both the STOXX 50 and the STOXX 600 slipped 0.2% as traders reacted to hotter-than-expected U.S. inflation data and awaited further updates on Chinese stimulus measures expected over the weekend.

• Specific stocks faced pressure at the end of the week: Bayer dropped 1.1%, Deutsche Telekom fell 0.7%, and automakers VW and BMW were also down 0.6% and 0.4%, respectively.

For the week, the STOXX 50 gained 0.3%, while the STOXX 600 remained largely unchanged, reflecting the market's cautious optimism amid inflation concerns and global economic developments.

Fixed income market

• US: This week, the yield on the 10-year Treasury rose to over 4.11%, its highest level in more than two months. This increase followed fresh inflation data, which consolidated concerns that inflation may remain sticky above the Fed’s target. Although producer prices remained flat in September, the slight rise in core producer prices exceeded expectations, echoing the elevated core inflation seen in the CPI report earlier in the week. These developments raised fears that persistent underlying inflation could limit the Federal Reserve's ability to implement significant rate cuts next year.

  
  

• UK: Britain’s 10-year yield rose by three basis points to 4.21%, with the UK 10-year gilt yield hovering around 4.2%, close to a three-month high. This movement mirrored an uptick in US bond yields, as traders revised their expectations, believing that the Federal Reserve may not cut interest rates as aggressively as previously anticipated. In the UK, investors are similarly preparing for a more cautious approach to rate cuts by the Bank of England, particularly after Governor Andrew Bailey suggested that the central bank could reduce rates more quickly if inflationary pressures continue to ease.

  
  

• EU: The yield on the German 10-year Bund rose to nearly 2.27%, its highest level since early September, in line with a global rise in bond yields. This increase reflects trader sentiment that the Federal Reserve may not cut interest rates as aggressively as previously thought, particularly after a hotter-than-expected inflation report and the release of the FOMC minutes. In Europe, the ECB is expected to implement another 25 basis point rate cut next week, with a potential additional reduction in December. However, policymakers are proceeding cautiously, as indicated by the minutes from the September meeting.

  
  

Commodities

• Oil price: Earlier this week, oil prices dropped after a recent rally fueled by Middle East tensions, as fears of supply disruptions eased. U.S. crude fell below $74 per barrel, with the rally stalling amid uncertainty over Israel's response to Iran's missile strike. Despite this, U.S. crude recorded its second weekly gain, with both U.S. and Brent benchmarks rising over 1% for the week.

  
  

• Gold: On Thursday, gold reversed a six-day decline as market participants reassessed the potential trajectory of the Federal Reserve's interest rate policy, in light of mixed U.S. inflation and labour market data.

  By the end of the week, gold had recovered its earlier losses, reaching $2,676.30 per ounce, as investors reevaluated their expectations for the scale of the Fed's anticipated rate cuts for the remainder of the year, following the latest economic indicators.

FX

• GBP/USD = $1.31 (The GBP is gaining against the USD as Britain's economy returned to growth in August, following two consecutive months of stagnation, boosting investor confidence in the UK’s economic outlook.)

• EUR/USD = $1.09 (Euro traders bracing for the currency’s worst weekly decline since July. This retreat comes as markets anticipate a potential ECB rate cut next week. The euro experienced volatility following stronger-than-expected U.S. inflation and jobless claims data, which added further pressure on the currency.)

  Source: CNBC, Bloomberg, FTnews and Reuters.

  
  

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