Thoughts of the Week #8
Weekly Market Recap | Week of November 18, 2024
This Week in Review …
· USD Core CPI (Oct) 0.3% MoM
· USD PPI (Oct) 0.2% MoM
· JPY (Q3) 0.2% QoQ
· GBP GDP (Q3) ?1.0%? YoY
· USD Retail Sales (Oct) 0.4% MoM
The Week Ahead …
· EUR and GBP CPI (Oct)
· USD Manufacturing and Service PMI (Nov)
· German GDP (Q3)
United States: Resilient Data and Fed Caution
US equities recorded their third weekly decline in four, with the S&P 500 falling 2.08% to pre-election levels. Economic data was mixed, as retail sales rose by 0.4% in October, exceeding expectations, while upward revisions to September figures highlighted robust consumer spending. However, the Producer Price Index (PPI) for October showed renewed acceleration, heightening concerns about persistent inflation. Industrial production contracted by 0.3% for the second straight month, and capacity utilisation fell to 77.1%, indicating sustained weakness in the manufacturing sector.
The Federal Reserve maintained a cautious outlook, with Chair Jerome Powell stating that there was no immediate need to cut interest rates. This stance dampened market expectations for a December rate cut, with futures pricing dropping from 80% to 58%. Treasury yields adjusted accordingly, with the 10-year note rising by 12 basis points to 4.45% and the two-year note, more sensitive to monetary policy, ending at 4.34%. Mortgage rates declined slightly, with the average 30-year fixed rate falling to 6.78%, offering limited relief to prospective homebuyers. Defensive sectors like utilities and real estate outperformed, while rising Treasury yields pressured technology and semiconductor stocks. Key tech players, including Nvidia, Apple, and Microsoft, fell between 1.5% and 3%, dragging indices lower. The PHLX Semiconductor Index (SOX) dropped 3.5%, reflecting concerns over borrowing costs and trade tensions with China.
China: Deflation Risks and Trade Tensions
Chinese markets faced significant pressure amid deflation concerns and renewed US trade uncertainties. The Shanghai Composite fell 3.52%, while the Hang Seng Index dropped 6.28%, reflecting heightened investor caution. Inflation data revealed ongoing economic challenges, with consumer prices rising only 0.3% year-on-year, and producer prices contracting by 2.9%, extending factory-level deflation. Retail sales offered some optimism, growing 4.8% year-on-year in October and surpassing expectations, indicating resilience in domestic consumption. The property sector showed early signs of stabilisation, aided by government stimulus measures such as relaxed mortgage rules and tax incentives. However, external vulnerabilities persisted, as the Chinese yuan (CNY) weakened to three-month lows. Analysts warned of further depreciation if trade tensions escalated under a Trump administration. The weaker yuan underscored concerns about capital outflows and China’s competitiveness in an increasingly uncertain global trade environment.
Europe: Diverging Growth and Policy Responses
European markets extended their decline, with the STOXX Europe 600 Index falling 0.69%, marking its fourth consecutive weekly loss. The UK economy showed signs of slowing, with Q3 GDP growth decelerating to 0.1%, weighed down by weak manufacturing activity. Construction provided a modest offset, but overall momentum remained subdued. Wage growth dropped to a two-year low, while unemployment ticked higher, reflecting pressures in the labour market and reinforcing the Bank of England’s cautious approach to monetary policy. In the Eurozone, Q3 GDP growth held steady at 0.4%, supported by stable employment figures that helped counter broader economic uncertainties. The European Central Bank (ECB) defended its October rate cut as a precautionary step to mitigate downside risks and ensure economic stability. Policymakers emphasised a data-dependent approach for future decisions, underlining the challenge of balancing inflation control with growth concerns. European markets remain caught between domestic economic fragility and geopolitical uncertainties, requiring investors to adopt a cautious stance.
Japan: Trade Pressures and a Weak Yen
Japan’s Nikkei 225 declined by 2.2% last week as trade uncertainties and a weakening yen dampened investor sentiment. The yen depreciated to JPY 155 per dollar, pressured by rising US yields and concerns about export competitiveness. GDP growth slowed to 0.2% quarter-on-quarter, driven by temporary boosts from tax relief measures and higher bonuses, while external demand remained weak, highlighting challenges for Japan’s export-reliant economy. The Bank of Japan (BOJ) hinted at a potential rate hike in December, contingent on inflation and economic trends. With inflation stabilising near its 2% target and economic activity showing resilience, policymakers suggested conditions might justify a shift from prolonged ultra-loose monetary policy. Such a move could significantly impact global markets, particularly given Japan’s role in global carry trades. The BOJ’s December meeting is expected to provide clarity on this potential policy shift.
Energy Market: WTI and Brent Crude
The oil market faced notable headwinds, with WTI crude prices declining by 4.4% to $67 per barrel. Weak demand forecasts from China, easing geopolitical tensions, and concerns over a projected 2025 supply surplus weighed on prices. The International Energy Agency (IEA) forecasted a surplus of 1 million barrels per day next year, applying additional pressure. Brent crude is expected to trade between $70 and $85 per barrel in 2025, but analysts warn of near-term upside risks should geopolitical conditions tighten. Tighter enforcement of sanctions on Iranian oil, potentially driven by increased US-Israel cooperation, could further disrupt supply.
Precious Metals: Gold Poised for a Record Rally
Gold prices fell 4.2% last week, pressured by resilient economic data and a stronger US dollar. Despite this, Goldman Sachs remains optimistic, forecasting gold could reach $3,000 an ounce by December 2025. Analysts attribute this to structural factors like increased central bank buying and cyclical support from exchange-traded fund flows as the Federal Reserve cuts rates. Gold has performed strongly this year, achieving record highs before retreating following Trump’s election victory, which bolstered the dollar. Goldman highlighted risks such as renewed trade tensions, US fiscal sustainability concerns, and central banks diversifying away from US Treasury reserves as potential drivers of speculative gold demand. Spot gold currently trades at $2,584 an ounce, after peaking above $2,790 last month.
Market Outlook
Looking ahead, markets are likely to remain volatile as investors assess economic data and policy developments. In the US, key releases such as housing starts, building permits, and consumer sentiment will be pivotal, while Nvidia’s earnings will offer insight into tech sector resilience. In China, inflation and currency trends will remain under scrutiny amid trade tensions. European markets will focus on political developments and economic stability, while Japan’s outlook will hinge on trade policy and the BOJ’s potential rate decisions. The overarching theme of “good news is bad news” persists, as stronger economic data heightens concerns about prolonged monetary tightening. Investors are expected to adopt a cautious approach, balancing near-term risks with strategic opportunities.