Calm Before the Storm?

For the week ending 25 October 2024

As of midday Friday, global equities were modestly lower on the week. The yield on the US 10-year note rose 12 basis points to 4.19% as markets priced in a slower pace of rate cuts and in anticipation of further deterioration in the US fiscal outlook if Donald Trump regains the White House. The price of a barrel of West Texas Intermediate crude oil edged up $1.70 from a week ago to $71.05. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), was little changed at 18.75. Next week’s US employment report followed by the US election on 5 November is likely to enliven markets in the weeks ahead.

MACRO NEWS

IMF sees “steady but underwhelming” global growth

According to its updated World Economic Outlook, the International Monetary Fund expects the global economy to grow 3.4% in 2024 and 2025, below the prepandemic average of 3.8% a year. The fund also said it expects the global inflation rate to fall to 4.3% by the end of next year from a 2022 peak of 9.4%, with advance economies returning to price stability sooner than emerging and developing economies. The growth outlook in the United States has been upgraded from the spring forecast, but the outlook for other large, developed economies has been downgraded. Risks to the growth outlook are tilted to the downside amid elevated policy uncertainty, the IMF said. Separately, the IMF predicted that the growth divergence between the US and the European Union will continue to widen as weak productivity and an aging workforce hold back Europe.

UK chancellor to redefine debt

Ahead of the introduction of the British Labour Party’s first budget since 2009, Chancellor of the Exchequer Rachel Reeves announced that the government will adopt a debt gauge called “public sector net financial liabilities” (PSNFL), casting aside the “public sector net debt” measure used by the prior government. PSNFL is a broader measure of the public balance sheet and includes financial assets such as student loans, according to the Financial Times. That shift will allow the government to potentially borrow as much as ￡50 billion for infrastructure investment over the next decade but goes against Reeve’s campaign promise not to “fiddle with the figures.” With tax hikes expected, UK consumer confidence is taking a hit, according to GfK’s consumer confidence index.

Putin proposes BRICS payment system

This week, Russian President Vladimir Putin hosted 20 heads of state in Kazan, Russia for the annual BRICS summit. The focus of last year’s event was a proposed common currency to be used by member states, but progress on that front has been minimal. However, having been shut out of the Swift international payments system in the wake of his country’s invasion of Ukraine, Putin proposed an alternative mechanism that would use blockchain, tokens and digital currencies as alternatives to the US dollar-based global payments system. Analysts say the main problem with Putin’s proposal is that the US has made clear that that working with Russia will cost countries access to the US dollar, making the plan unworkable.

QUICK HITS

Preliminary purchasing managers’ indices for October declined in the United Kingdom and Japan while those in the US and eurozone held steady.

The Wall Street Journal reported Thursday that Russia provided satellite data to Houthi rebels used to target missile and drone attacks on western shipping in the Red Sea. The data were passed through members of Iran’s Islamic Revolutionary Guard Corps, the paper said.

Bank of Japan Governor Kazuo Ueda said Thursday there is ample time to deliberate on the BOJ’s rate hike, which strongly suggests there will be no move at next week’s meeting.

According to a quarterly survey by the Confederation of British Industry, business sentiment?in the UK deteriorated in October at the fastest pace in two years, to -24% from -9% in July.

The People’s Bank of China cut its one-year and five-year loan prime rates by 0.25% to 3.10% and 3.60%, respectively.

Analysts at Goldman Sachs expect the S&P 500 Index to return just over 3% annually on a nominal basis over the coming decade and see about a 72% chance the benchmark will trail the return on Treasury bonds.

Citing fiscal progress and its adherence to EU fiscal rules, Fitch Ratings upgraded Italy’s credit outlook to positive late last Friday.

France presented its longer-term fiscal plan on Monday. The government projects robust 1.5% GDP growth in 2027 and 2028 and expects the deficit to fall to 2.8% in 2029, below the EU’s 3% cap. The deficit it projected at 5% in 2025, 4.6% in 2026, 4% in 2027 and 3.3% in 2028.

According to Chinese financial data provider Wind, share buybacks in China have soared to a record high this year as Beijing has pushed for companies to return cash to shareholders to support equity markets.

The International Monetary Fund expects the global economy to grow 3.4% in 2024 and 2025, below the prepandemic average of 3.8% a year. The organization expects the global inflation rate to fall to 3.5% by the end of next year from a 2022 peak of 9.4%.

European Central Bank President Christine Lagarde said she is hopeful that inflation will reach the central bank’s 2% target soon that expected.

September US existing home sales fell 1% to a 3.84 million annual pace. S

Under increasing political pressure, Canadian Prime Minister Justin Trudeau announced that Canada will admit nearly 20% fewer permanent residents next year, or 395,000, compared to this year’s?expected level?of 485,000. The numbers will then?continue to drop?by about 4% annually through 2027.?

Bank of England Governor Andrew Bailey said this week that UK inflation is cooling faster than anticipated, suggesting rates will come down more quickly than expected.

EARNINGS NEWS

With about 36% of the constituents of the S&P 500 Index having reported for Q3 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings rose around 3.4% compared with the same quarter a year ago, according to data from FactSet. The average upside earnings surprise is 6%, up from 4% in Q2. This is slower than the 11.2% pace set in Q2. Sales growth is up 4.6% year over year.

THE WEEK AHEAD

Five of the Magnificent 7 report Q3 earnings results between Tuesday and Thursday.

Tuesday: Japan unemployment rate, US JOLTS job openings, Case-Shiller home price index

Wednesday: Australia CPI, eurozone GDP, US GDP

Thursday: Japan retail sales, Australia retail sales, eurozone CPI and unemployment, US employment cost index and core PCE

Friday: Bank of Japan meeting (no change expected), US non-farm payrolls, global manufacturing PMIs

?Stay focused and diversified

In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your investment professional, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com .

The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.

Past performance is no guarantee of future results.

Sources:?MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.