Thoughts of the Week #6
Weekly Market Recap | Week of November 04, 2024
This Week in Review …
· BOJ ST Interest Rates remained at 25bps
· CNY PMI 50.1 (exp. 49.8)
· US Q3 Real GDP 2.8% (exp. 3.0%)
· Household consumption increased 3.7% (exp. 0.4%)
· US Core PCE Index (MoM) 0.3% (exp. 0.3%)
· US Non-farm Payrolls 12K (exp. 106K), Unemployment 4.1%
The Week Ahead …
· US Presidential Election
· BOE Interest Rate Decision
· FOMC Meeting
· NPCSC Meeting
领英推荐
US Elections
Strongest USD response comes from a Republican sweep with broad tariff introductions and fiscal stimulus, requiring congressional actions which raises the cost of US imports and lowers the cost of doing business domestically. A divided Republican government would have a smaller USD rally given tailwinds likely coming from tariffs increases alone. FX markets might initially focus on US-China trade policy implications given geopolitical tensions soon after the new term begins.
A Democratic sweep or divided government would likely result in USD downside as markets reverse bets on more dramatic tariff polices. FX markets should revert to trading the current macro backdrop which would still mean that the USD remain relatively supported.
Tariffs remain the key driver of FX moves given the direct impact on consumer prices and GDP growth. 60% tariffs on $430B of goods from China and a 10% on $2.74T of imports from the rest of the world. The average tariff on Chinese goods is 19%, an increase of 40 pp would be worth about $170B. Impact on headline inflation estimated by BofA will be about 0.9pp. New tariffs would increase annual US customs revenue by about $450B.[1] Goldman Sachs economist estimate a 2% hit to China’s economy should the tariffs be implemented. Although current vulnerability of China’s economy amid a severe housing downturn, manufacturing overcapacity and deflationary pressures may prompt Chinese policymakers to act more decisively in response. CHN and EUR are the most policy-sensitive currencies given that China and Europe are likely to be directly impacted by Trump’s proposed tariffs. USDCNY could weaken to 7.40 under a Republican win as Chinese policymakers would seek? depreciation of currency to counter the growth shock from higher tariffs. PBOC would likely keep currency stable in the lead-up and only act when the tariffs have been announced as seen in 2018-19. EUR may fall up to 10% as the US/Europe IRD may widen further due to a 10% across-the-board tariff and potential retaliatory tariffs adding to US inflation and driving US rates higher. More protectionist US trade policies may call for ECB to cut rates further to counter the elevated trade tensions weighing on European growth.
Election impacts on rates markets is less substantial due to a more constrained fiscal environment. A 2nd Trump administration may lead to further curve steepening as LT yields trend higher as a result of inflationary effects of tariffs and fiscal policies. Treasury markets rallied sharply from May through September’s rate cuts, taking 10Y yields down from 4.6% to 3.6%. With stronger-than-expected incoming data and inflation sticky above the 2% Fed target, interest rate markets have quickly reversed their aggressive rate-cut expectations with the 10Y yield reversing about half of its previous drop. Markets have priced in higher inflation compensation in Treasury Inflation Protected Securities (TIPS) and has sharply tempered rate cut expectations.
Weak Non-farm Payrolls (NFP) numbers ?of 12K – albeit muddied by 2 hurricanes and a major strike at Boeing Co. keep Fed on track for 25bps cut next week. Unemployment held at 4.1%. Treasury yields ended higher as traders unwind their positions in anticipation of trio of risk tied to the election, interest-rate cut and a three big debt auction in the US. LT ?yields led the advance while a key gauge (BBDXY:INDEX) of the USD headed for its strongest close since July. Traders held expectations of 44bps cut by year-end spread evenly across both FOMC meetings. [2]
In the equity markets, bullish sentiment has dominated for 36 consecutive weeks. S&P500 is near all-time high with a forward PE of 21.4x (abv. 20Y average of 16.3) driven by AI earnings. Beyond the Mag 7, forward PE stands at 17.3x. The small premium seems justified given the earnings growth for the overall market to drive equity prices in the months ahead. Strong US projected growth opposed to weaker potential in China and Europe suggest that US will continue to attract capital. This will likely continue to compress dollar assets spreads globally, and EM debt will be no exception. When combined with the negative issuance of dollar-denominated EM HY sovereign debt, there is potential for EM external debt prices to rally. However, for bearish investors, after a bull run of more than 62.3% in the S&P500 since October 2022, it is understandable to question how long more this could run. Equity-bond correlations have recently returned to negative territory amid downside growth concerns, reinforcing the case for diversification. [3] ?
Brent and WTI Outlook
Oil edged higher on reports that Iran may be preparing an attack on Israel from Iraqi territory in the coming days.[4] WTI surged 3.2% on Friday, before settling below $70/b. Brent rose 0.4%, settling near $73/b. Oil analyst warned that the market had over-corrected and future regained some of the lost ground in the recent days. Oil derivative markets showed signs of traders pricing in large premiums for bullish calls. Developments in the Middle East have been pointing to a potential easing of hostilities with Israel considering a US-led proposal to end the conflict in Lebanon. China’s manufacturing activity unexpected picked up in Oct despite a weeklong holiday, offering signs of stabilisation after Beijing unleashed stimulus to shore up the economy. Residential property sales also picked up unexpectedly in Oct, the first YoY increased of 2024. On the flip side, OPEC’s oil output rose 370K b/d last month (2.9M b/d) as Libya restored output that was halted during a brief political crisis. OPEC+ are scheduled to begin a series of monthly supply increases by adding 180K b/d in Dec. US oil majors’ increases were fuelled by pumping record amounts of crude from Permian Basin continues to surprise analysts with YoY growth and efficiency gains. Exxon and Chevron grew output by 24% and 7% respectively. Growth in US production about 50% higher than Saudi Arabia is helping to keep millions of OPEC barrels off the market.