Summary of the week - 18th Oct 24

Interest rate

• US: In September 2024, the Fed reduced the target range for the federal funds rate by a substantial 50 basis points to 4.75%-5%. However, recent data showing persistent inflation and stronger-than-expected US retail sales suggest that additional rate cuts may be off the table for the foreseeable future.

• UK: The Bank of England held the Bank Rate steady at 5% during its September 2024 meeting, following a 25-basis-point cut in August, the first in over four years. With UK inflation falling below the central bank's target and expanded GDP data released last week, speculation has intensified that policymakers may opt for further rate cuts at their final two meetings of the year, signaling a potential reduction in borrowing costs soon.

• EU: The European Central Bank reduced interest rates by 25 bp for the third time this year after data showed policymakers are making significant progress in controlling inflation. The European Central Bank has set the deposit facility, main refinancing operations, and marginal lending facility rates at 3.25%, 3.40%, and 3.65%, respectively. This decision reflects an updated inflation assessment, indicating that disinflation is advancing as expected.

• JPN: The Bank of Japan (BoJ) unanimously maintained its key short-term interest rate at approximately 0.25% during its September meeting, marking the highest level since 2008 and aligning with market expectations. The decision highlighted the central bank's cautious approach, signaling no immediate plans for further rate hikes after increases in March and July. The BoJ emphasized the need for additional time to monitor financial markets, with some board members expressing hawkish views. Earlier this week, BoJ board member Seiji Adachi stated that the bank should raise rates at a "very moderate" pace, cautioning against abrupt policy changes due to uncertainties surrounding the global economic outlook and domestic wage growth.

  
  

Inflation rate

• US: Markets are signaling that the fight against US inflation is far from over. The Treasury breakeven rate, a key measure of long-term inflation expectations, has risen steadily over the past month to around 2.3%, surpassing the Federal Reserve's target. Meanwhile, US retail sales surged more than anticipated in September, reflecting the resilience of consumer spending that continues to drive the economy. Retail purchases, unadjusted for inflation, grew by 0.4% following a 0.1% increase in August, with sales excluding autos and gasoline rising 0.7%. This strengthened retail activity at the end of the third quarter underscores the robust nature of consumer spending.

• UK: In September 2024, UK inflation fell to 1.7%, dipping below the Bank of England's 2% target for the first time in over three years, raising expectations for further rate cuts. Core inflation also dropped to 3.2%, lower than market forecasts. Meanwhile, UK retail sales unexpectedly rose by 0.3%, driven by strong non-food store sales, while supermarket sales saw their largest decline of the year at 2.4% due to poor weather and reduced spending on luxury food items.

• EU: With inflation expected to reach the 2% target sooner than previously anticipated, another rate cut on December 12 is considered highly likely. As of October 17, 2024, the inflation rate in the European Union (EU) dropped to 2.1%, down from 2.4% the previous month and 4.9% a year earlier. In the euro area, annual inflation fell to 1.7% in September 2024, down from 2.2% in August.

• JPN: Japan's annual inflation rate dropped to 2.5% in September 2024, down from 3.0% in the previous month, marking the lowest level since April. Electricity prices saw the smallest increase in three months as the effect of the energy subsidy removal in May faded (15.2% vs. 26.2% in August), while gas prices rose at a slower pace (7.7% vs. 11.1%). Additionally, price growth moderated for food (3.4% vs. 3.6%), furniture & household utensils (4.8% vs. 5.2%), transport (0.1% vs. 0.2%), and culture (4.3% vs. 4.8%). Prices continued to decline for communication (-2.6% vs. -2.4%) and education (-1.0%, unchanged).

• China: China's annual inflation rate eased to 0.4% in September 2024, falling short of market expectations and down from 0.6% in August. This marked the eighth consecutive month of consumer inflation but the lowest reading since June, underscoring the need for additional policy measures from Beijing to tackle rising deflation risks.

  
  

Equity market

• US: The US Equity market closed at 5,864.67, gaining 34.86 points or 0.60% over the past five days. The index showed a mix of ups and downs throughout the week, with a low of 5,846.11 on October 16 before rebounding toward the end of the week.

  At the start of the week, the S&P 500 and Dow Jones reached all-time highs, driven by strong jobs data from previous week and easing inflation. Nvidia hit a new record on Tuesday, but broader markets saw a brief dip due to concerns about chip sales and ASML’s disappointing outlook. Goldman Sachs and Morgan Stanley exceeded expectations with strong quarterly earnings, boosting market sentiment. By midweek, stocks rebounded, with the Dow posting record closes and Nvidia achieving a new intraday high on Friday. The S&P 500 ended the week up 0.4%, while the Nasdaq 100 gained 0.7%, and the Russell 2000 rose nearly 2%.

• UK: The UK Equity market ended the week on a positive note, rising 1.27% over the past five days to close at 8,358.25. Despite some mid-week fluctuations, the index managed to rebound, driven by gains in the mining sector and overall optimism in the market. The weekly performance marked its best in two months, largely buoyed by expectations of further rate cuts by the Bank of England and positive corporate earnings reports.

  Friday’s session, however, saw the FTSE 100 slip by 0.32%, reflecting a cautious mood among investors. The decline came despite a surprising 0.3% increase in UK retail sales for September, which had been expected to fall. Gains in industrial metal miners, driven by rising copper prices and optimism around China's stimulus measures, helped limit losses. The mining sector, with stocks such as Anglo American, Glencore, Antofagasta, and Rio Tinto, saw gains of up to 1.8%, as stronger commodity prices boosted sentiment.

  Energy stocks like BP struggled, slipping 0.1% after reports emerged that the company was considering selling a minority stake in its offshore wind business, signaling a potential strategic shift under its new CEO.

• EU: The European stock market experienced a generally positive week, with the STOXX Europe 600 index closing at 524.99, up 0.51% over the past five days. The rally gained momentum on the 15th of October, likely driven by anticipation surrounding the European Central Bank's (ECB) decision to cut interest rates later in the week. Investors seemed to expect continued monetary easing from the ECB, which typically supports equity markets by making borrowing cheaper and encouraging investment.

  Sector-wise, European luxury goods and automakers saw notable gains, partly supported by favorable developments in China. The People's Bank of China (PBoC) implemented new liquidity measures, lifting sentiment for European companies with significant exposure to the Chinese market.

  Despite mixed earnings from major European companies like Nestle, which lowered its profit guidance, and ASML, which missed earnings estimates, the overall market remained resilient. The ECB's monetary support and expectations for further cuts helped maintain upward pressure on European stocks, with indices closing close to all-time highs.

• China: The CSI 300 Index showed resilience this week, closing at 3,925.23, up 0.26% over the past five days. By Thursday, concerns about China's property market and disappointing fiscal stimulus plans weighed heavily on sentiment. Despite a rebound on Friday, fueled by the People's Bank of China's (PBoC) re-lending facility for share buybacks, the Hang Seng could not recover earlier losses.

  Key events influencing the market include Tuesday's rally in Chinese stocks and a sharp sell-off on Wednesday, led by LVMH's share plunge, reflecting the impact of China's economic slowdown on luxury goods. On Thursday, investors were disappointed as China's much-anticipated property market stimulus fell short of expectations, causing a further slump. However, on Friday, the PBoC's surprise measures, which included liquidity support and potential future reserve requirement cuts for banks, helped stabilize the market, allowing the CSI 300 and Shanghai Composite to rally.

• JPN: The Nikkei 225 Index rose 0.18% to close at 38,981.75, while the Topix Index edged up 0.04% to 2,689 on Friday. This modest gain came after a two-day decline, as investors were encouraged by signs of slowing domestic inflation, which helped ease concerns about potential shifts in the Bank of Japan's monetary policy. The market's recovery reflects cautious optimism, with investors balancing inflation data against hawkish expectations for the central bank.

  
  

Fixed Income market

• US: The yield on the 10-year U.S. Treasury note held near the 4.1% mark on Friday, maintaining its highest level in over two months. This stability follows a four-week advance, during which investors reevaluated expectations for significant interest-rate reductions by the Federal Reserve. The market has been closely monitoring economic data to assess the Fed’s policy outlook, and recent releases have suggested that the U.S. economy remains resilient to elevated interest rates.

  Earlier in the week, 10-year Treasury yields declined by seven basis points to 4.03%, reflecting cautious sentiment among debt traders. However, this decline came against a broader backdrop of credit spread indexes falling, signaling continued confidence in corporate debt markets despite ongoing macroeconomic uncertainties.

• UK: Britain's 10-year gilt yield fell by eight basis points to 4.16% on Monday, continuing a downward trend as markets increasingly price in expectations of upcoming Bank of England (BoE) rate cuts. The yield edged slightly higher to 4.09% later in the week but remained below the 4.1% mark, with market participants anticipating that the BoE will reduce rates at least once before the end of the year, likely in November, with another possible cut in December.

  Despite this, UK consumer spending proved more resilient than expected in September, with retail sales rising by 0.3%, surpassing forecasts of a 0.3% decline. This unexpected growth in consumer spending suggests underlying economic strength, contradicting concerns that looming tax increases might dampen demand. The combination of falling gilt yields and stronger-than-expected retail figures reflects the market’s delicate balance between anticipating monetary easing and navigating the economic challenges ahead.

• EU: Germany's 10-year Bund yield declined by five basis points to 2.22%, falling below the 2.2% mark as markets ramp up expectations of further monetary easing by the European Central Bank (ECB). The ECB implemented its third rate cut of the year, citing improved control over inflation, though it also warned of a deteriorating economic outlook for the Eurozone.

  Analysts interpreted ECB President Christine Lagarde's remarks as a potential signal for downgraded economic forecasts. Money markets are now pricing in a 25 basis point rate cut at each ECB meeting through next summer, with a 25% chance of a 50 basis point cut in December. Meanwhile, stronger-than-expected US economic data tempered expectations for aggressive rate cuts by the Federal Reserve, suggesting that monetary policy in the US will remain relatively more restrictive than in the Eurozone.

• JPN: Japan's 10-year government bond yield rose to approximately 0.98% on Friday, reaching an 11-week high despite a notable slowdown in domestic inflation. The bond yield increase likely reflects investor reaction to the Bank of Japan's (BOJ) decision to maintain its current interest rate levels, deferring any potential cuts for the time being. The BOJ's stance signals caution as policymakers closely monitor inflation and other economic indicators before making any further adjustments.

• China: China's 10-year government bond yield rose to 2.09% after two consecutive sessions of losses, driven by a series of stronger-than-expected economic indicators. The country's GDP grew by 4.6% year-on-year in Q3 2024, slightly surpassing market forecasts and signaling steady recovery momentum. September's retail sales also surprised to the upside, rising by 3.2%, marking the fastest pace in four months, while industrial production increased by 5.4%, further reinforcing optimism about the country's economic outlook. Additionally, the unemployment rate fell to a three-month low of 5.1%, indicating improvements in the labor market.

  However, this positive data is offset by persistent challenges in the real estate sector. New home prices in 70 cities continued to decline for the 15th consecutive month, posting a sharp 5.7% year-on-year drop, the steepest since May 2015. While the upbeat economic figures have helped boost bond yields, the ongoing struggles in the property market remain a significant headwind for China's overall economic recovery.

  
  

Commodities

• Gold: Gold has surged 30% this year and is nearing the $2,700 an ounce mark, driven by heightened investor demand amid global economic uncertainties and persistent inflation concerns.

  
  

• Oil: WTI crude oil futures fell 2% on Friday, closing at $69.2 per barrel, marking their largest weekly decline since early September with a drop of over 8%. The downturn was fueled by weaker demand forecasts from both OPEC and the International Energy Agency (IEA), slowing economic growth in China, and easing geopolitical tensions in the Middle East. Both OPEC and the IEA revised their demand outlooks downward for 2024 and 2025, contributing to the sharp decline in prices.

  Money managers significantly reduced their long-only positions in WTI by 12,309 lots, bringing the total to 172,341, the lowest level since February, according to the latest Commodity Futures Trading Commission data on futures and options. Similarly, long-only positions in Brent dropped by 26,294 lots to 229,936, as reported by ICE Futures Europe for the week ending October 15. This shift suggests a more cautious outlook from investors amid ongoing concerns over demand forecasts and market conditions.

  
  

FX

• GBP/USD = $1.31 (The pound slipped to its lowest level since August as UK inflation dropped below the Bank of England's 2% target, fuelling expectations of further interest rate cuts by the central bank.)

• EUR/USD = $1.08 (The euro declined by 0.2% to $1.0887, as traders increased their bets that the European Central Bank will implement a significant rate cut in December.)

• CNY/USD = $0.14 (The offshore yuan strengthened driven by traders' optimism following the release of positive economic data from China.)

• JPN/USD = $0.0067 (The yen hovering near 11-week lows as traders balanced the weaker inflation data against hawkish expectations for Bank of Japan policy adjustments.)

Source: CNBC, Bloomberg, FTnews and Reuters.

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