Week #43 — Market Update for October 20-25, 2024
Executive Summary
US Stock Market: Major U.S. stock indices showed mixed movements, with the Nasdaq Composite edging higher, driven by a 22% weekly surge in Tesla shares following strong earnings and a forecast of up to 30% vehicle sales growth next year. This increase—the largest since May 2013—turned Tesla’s year-to-date performance positive.
Rising yields, a strengthening U.S. economy as shown by recent business activity surveys and retail sales data, and pre-election jitters could trigger a shift to risk-off sentiment after six consecutive weeks of gains. Next week, the busiest of the earnings season, may add to investor concerns, as corporate results are seen as more critical to market performance than the upcoming election or Federal Reserve policy.
Cryptocurrencies: Cryptocurrency markets declined amid news that U.S. authorities are investigating Tether Holdings Ltd., the issuer of USDT, for potential sanctions and anti-money-laundering violations. The Wall Street Journal reported that the Manhattan U.S. Attorney’s Office is probing whether USDT has been used by third parties in illicit activities, such as financing the drug trade, terrorism, and hacking. Tether’s USDT briefly dropped to 99.81 cents, while Bitcoin fell 3.3% to $65,878, and other cryptocurrencies, including Solana and Dogecoin, dropped around 5.5% and 5.6%, respectively.
Global Stock Markets: Global stock markets moved in line with the U.S. market.
Economic Data: October flash PMI data from S&P Global indicated continued growth across major developed economies, with the U.S. leading, while the eurozone and Japan faced contractions, and the UK showed modest growth. Overall expansion slowed to a six-month low as manufacturing weakness spread to services. Manufacturing output contracted for the fifth consecutive month across the G4 economies, while services marked a twelfth month of growth, though at its slowest pace since April. The U.S. led with resilient services, despite a third month of manufacturing declines, in contrast to service contractions in Japan and minimal growth in the UK and eurozone. In the G4, only the UK showed an increase in manufacturing output, though at a six-month low pace.
Earnings Season: Earnings season is in full swing, with 181 S&P 500 companies, representing 36% of the index, having reported Q3 2024 earnings (up 22 percentage points from the previous week). Of these, 79.0% exceeded analysts' expectations, above the long-term average of 66.9% and in line with the four-quarter average of 79.1%. Next week, 34% of S&P 500 companies are set to report, including five of the Magnificent 7: Alphabet on Tuesday, Meta Platforms and Microsoft on Wednesday, and Amazon and Apple on Thursday.
Monetary Policy: Market expectations for a November rate cut increased slightly, with the likelihood rising to 95.1% from 90.4% a week ago. However, traders did not revise their 2024 monetary easing projections.
Bond Market: The U.S. Treasury yield curve flattened, with 10-year yields rising 17 basis points to 4.25% and 30-year yields increasing 13 basis points to 4.51%. Analysts partly attribute these shifts to betting markets leaning towards a potential Trump victory, which is anticipated to bring expansionary fiscal policies, particularly through tax cuts.
For comprehensive insights and a deeper understanding, readers are encouraged to refer to the full article.
US Stock Market
Major U.S. stock market indices posted mixed movements, with the tech-heavy Nasdaq Composite advancing slightly, driven by a 22% weekly surge in Tesla shares following strong earnings and a forecast for up to 30% vehicle sales growth next year. This significant increase—the largest since May 2013—turned Tesla’s stock performance positive for the year.
Rising yields, along with the strengthening U.S. economy, highlighted by recent business activity surveys and retail sales data, as well as pre-election jitters, could lead to a shift to risk-off sentiment after six consecutive weeks of gains. Additionally, next week marks the busiest week of the reporting season, which may add some concerns for investors, as they view corporate results as more crucial for market performance than the outcome of the November election or the Federal Reserve’s monetary policy.
Cryptocurrency markets saw a decline after news that US authorities are investigating Tether Holdings Ltd., the issuer of the stablecoin USDT, for potential breaches of sanctions and anti-money-laundering laws. The Wall Street Journal reported that the probe, led by the Manhattan US Attorney’s Office, centers on whether USDT has been used by third parties for illicit activities, such as financing the drug trade, terrorism, and hacking. Tether’s USDT, which aims for a one-to-one peg to the dollar, briefly dipped to about 99.81 cents, while Bitcoin fell 3.3% to $65,878, and other cryptocurrencies like Solana and Dogecoin dropped by around 5.5% and 5.6%, respectively.
In terms of sector performance, only one sector showed positive dynamics, due to the high share of Tesla, which holds the second-largest weight in the XLY ETF.
The Fear & Greed Index, which measures market sentiment, dropped to 59 from 75, settling back into the "greed" zone.
The SPY ETF is trading within an upward-sloping channel, highlighting a sustained uptrend. The price is currently in the upper half of the channel, indicating positive momentum, though it faces resistance at higher levels. Immediate resistance around $584-$585 could challenge the price, but a breakout would signal a continuation within the channel. A pullback could find support at the 50-day SMA and the mid-channel line, maintaining the bullish trend as long as these levels hold.
The earnings season is underway. According to Refinitiv, 181 companies in the S&P 500 Index have reported earnings for Q3 2024 so far, accounting for 36% of the total (up 22 percentage points from the previous week). Of these, 79.0% have exceeded analysts' expectations, down from 83.1% the previous week. This rate is higher than the long-term average of 66.9% and in line with the four-quarter average of 79.1%.
Meanwhile, earnings growth projections for the quarter have been revised upward. S&P 500 companies are now forecasted to see year-on-year growth of 4.4%, or 7.0% excluding the Energy sector. This is an improvement from last week's projections of 4.0% and 6.5%, respectively.
During the week of October 28, 169 companies from the S&P 500 index are scheduled to present their financial results, including five members of the Magnificent 7: Alphabet on Tuesday, Meta Platforms and Microsoft on Wednesday, and Amazon and Apple on Thursday. Among all stocks, these are some of the most eagerly awaited earnings reports:
Global Markets
Global stock markets moved in tandem with the US market.
The ACWX ETF remains within an upward channel, continuing its trend from earlier in the year. However, it has pulled back from recent highs, breaking below the 50-day SMA, and is currently closer to the middle-lower area of the channel, which could act as support.
Economic Indicators, Statistics and News
Several important macroeconomic indicators and economic news were published during the week:
Global
·????? The International Monetary Fund (IMF) revised its global growth forecast for next year downward, projecting a 3.2% expansion, 0.1 percentage points lower than its previous July estimate. While the forecast for 2024 remains unchanged at 3.2%, the IMF emphasized rising risks from factors such as geopolitical conflicts, trade protectionism, and economic uncertainties. Inflation is expected to ease to 4.3% in 2025, down from 5.8% this year.
Chief Economist Pierre-Olivier Gourinchas highlighted concerns over the potential escalation of regional conflicts, which could disrupt commodity markets, as well as trade tensions that could reduce global output by 0.5% by 2026. The IMF downgraded its forecast for the euro area to 1.2% due to weak manufacturing in Germany and Italy, while Mexico’s growth outlook saw the largest downward revision among major economies, reflecting the impact of monetary tightening. China's growth was also cut to 4.8% for this year, with concerns about the real estate sector and low consumer confidence, although its 2025 forecast remains at 4.5%.
In contrast, the US outlook was revised upward, with growth expected to reach 2.8% this year and 2.2% next year, driven by stronger consumption. The IMF praised central banks for managing inflation without triggering recessions, noting that the disinflationary efforts were more successful than initially expected. However, the report warns of potential risks to growth from monetary tightening, sovereign debt pressures in emerging markets, and renewed spikes in food and energy prices, fueled by climate shocks, wars, and geopolitical tensions.
·????? In October, flash PMI data from S&P Global indicated continued growth among the world’s major developed economies, with the US performing the strongest, while the eurozone and Japan faced contractions, and the UK showed only modest growth. The overall expansion rate dropped to a six-month low, as weakness from manufacturing began affecting services. Manufacturing output contracted for the fifth consecutive month across the G4 economies, while services saw twelfth consecutive months of growth, though at a slower pace since April. The US led growth, driven by resilient services even amid a third month of manufacturing declines, contrasting with contractions in services activity in Japan and minimal growth in the UK and eurozone. In the G4, only the UK showed an increase in manufacturing output, yet at a six-month low pace.
October also saw a sharp decline in backlogs across G4, hinting at excess capacity as firms fulfilled orders placed in previous months. This led to employment cuts for the second time in three months, marking no net job growth across the G4 since July. Employment declines were noted in the US, eurozone, and UK, with a minimal increase in Japan marking its lowest in over a year, signaling softening labor markets.
Despite these challenges, business confidence saw a boost, reaching its highest level since June, after September’s 22-month low. However, this optimism was primarily within the US, attributed to stability hopes post-election, while other G4 countries saw heightened geopolitical concerns, including conflicts in the Middle East and Ukraine. Additionally, inflation pressures continued easing; average prices for goods and services rose at the slowest rate in four years. The G4 PMI Prices Charged index reached 52.0, nearing pre-pandemic levels, with service sector inflation moderating sharply.
The US was notable for leading in output while experiencing the slowest price increase rate, supporting speculation of a “soft landing” in inflation. Meanwhile, the UK faced the steepest price rises among the G4, with competitive pressures and lower input costs helping reduce selling price inflation across these economies. As service sector-driven inflation softened, October saw service prices nearly aligning with goods prices, suggesting a shift from the post-pandemic trend of elevated service sector inflation. These trends highlight both resilience and challenges as G4 economies navigate inflation control and sectoral disparities amid global uncertainties.
US
·????? In the 2024 U.S. presidential election, the race between Donald Trump and Kamala Harris is exceptionally tight, with both candidates receiving 49% support among likely voters in seven key swing states, according to a Bloomberg News/Morning Consult poll. The poll's overall statistical margin of error is 1 percentage point, highlighting the razor-thin margins that could determine the outcome of the election.
Trump's campaign is focusing on mobilizing voters who typically do not turn out, while Harris aims to energize women and attract moderate Republicans. In terms of personal attributes, swing-state likely voters perceive Harris more favorably on qualities such as mental fitness, honesty, and compassion. Conversely, Trump is viewed by more voters as experienced, patriotic, and a strong leader.
On the crucial issue of the economy, Trump holds a slight advantage, with 50% of swing-state likely voters trusting him more to handle economic matters, compared to 45% for Harris. This issue has consistently ranked as the top priority for voters in these states. Although Harris has improved the Democratic position compared to President Joe Biden's previous standing, she has not fully closed the gap on economic trust.
Harris has made significant gains among Black voters, voters under 35, and those who did not participate in the 2022 midterm elections. She has also increased support among women by emphasizing her stance on abortion rights. Among voters who have negative opinions of both candidates, Harris leads Trump by 22 percentage points in swing states. However, among those who now have negative views of both her and Trump, she trails by 18 points.
Steve Schwarzman, CEO of Blackstone Inc., believes the U.S. is likely to avoid a recession regardless of the election outcome, citing a strong economy and stimulative policies proposed by both candidates. The International Monetary Fund's First Deputy Managing Director, Gita Gopinath, emphasized that the U.S. election will have global implications, with the U.S. economy being "very strong" but cautioning that a more expansionist fiscal stance could alter the economic outlook.
Investors are preparing for the potential impact of the election on various industries. Bank of America strategists suggest that the election's outcome could significantly affect specific sectors rather than the market as a whole. A Republican sweep could benefit small-cap stocks but may pose risks for businesses reliant on immigrant labor due to Trump's proposed immigration clampdowns. Renewable energy and electric vehicle sectors might face pressure under a Republican administration, while a Democratic win could benefit U.S. online media companies if a TikTok ban is implemented.
Specific industries stand to be affected by the election results:
o?? Big Banks: Under a Harris administration, large banks like Bank of America, Goldman Sachs, Citigroup, Wells Fargo, and JPMorgan could face a 9% increase in capital requirements, potentially by the third quarter of 2025. A Trump victory could delay or soften these requirements, affecting profits and lending capacities.
o?? Health Care: Insurers such as Centene and UnitedHealth risk a projected $25 billion revenue drop in 2026 if enhanced Affordable Care Act subsidies are not extended. Harris supports extending these subsidies, which help millions afford health insurance. Trump and Republicans aim to repeal the ACA, which could result in 3.8 million fewer enrollees.
o?? Electric Vehicles: A Harris win would likely maintain federal tax credits of up to $7,500 for new electric vehicles and $4,000 for used ones. Under Trump, these incentives could be reduced or eliminated, and he has promised to end policies favoring EVs "on day one." This could impact manufacturers like Tesla, Rivian, and General Motors.
o?? Retail: Retailers could be adversely affected by Trump's proposed tariffs of 10% to 20% on all imported goods and 60% on Chinese products. With 97% of clothing and 98% of footwear sold in the U.S. being imported, primarily from China, tariffs could significantly impact sales volumes and profit margins.
o?? Energy: Oil, gas, and coal producers could benefit from a Trump victory through deregulation and reversed policies on emissions. Trump's plans include expanding liquefied natural gas exports and terminating regulations limiting emissions from fossil fuel plants. Clean energy producers might fare better under Harris, though offshore wind projects could face challenges under a Trump administration.
Moreover, investors are increasing their positions in gold, which hit a record high, as a hedge against inflation and potential populist policies if Trump wins. Gold funds saw their largest weekly inflow since July 2020. The U.S. dollar has strengthened, with hedge funds being the most bullish since June 2021, anticipating that a Trump victory could lead to higher inflation, a rising budget deficit, and trade tensions with China.
·????? In October, US business activity grew steadily, driven by strong services demand, with the S&P Global flash composite PMI increasing to 54.3, marking an expansion despite manufacturing's decline. The measure of future output expectations jumped by 8 points, indicating improved confidence from both service providers and manufacturers anticipating a post-election uptick in business spending. Inflationary pressures showed a modest decline; while input costs remained high, the prices received index fell to a four-year low, with selling price inflation for goods and services also dropping to pandemic-era lows due to competitive pricing. Service sector growth was supported by the highest new business index since April 2022, propelled by rising domestic demand, although employment has fallen for three consecutive months, hovering around breakeven.
September’s retail sales rose more than anticipated, with a 0.4% increase and a notable 0.7% gain excluding auto and gasoline, signaling resilient consumer spending. Ten of thirteen retail categories saw increases, with significant gains in miscellaneous, apparel, and grocery stores, while gasoline station receipts dropped due to lower prices. The “control group” sales, used in GDP calculations, surged 0.7%, the highest in three months, with a robust 6.4% annualized pace over the quarter.
Meanwhile, economists adjusted US economic growth projections for Q3 2024 to Q1 2025 slightly upward, averaging around 2% over the period, with recession odds cut to 25%, the lowest since early 2022. Inflation is anticipated to stay close to the Fed's 2% target, facilitating gradual rate reductions. Bloomberg forecasts a deceleration in monthly payroll growth to 125,000 next year, down from the current 200,000 monthly average, with unemployment potentially rising to 4.3% from the current 4.1%. Economists expect three more rate cuts through 2025 and a moderate easing of household spending. In a stabilized political environment post-election, coupled with lower interest rates, forecasts indicate an uptick in business investments early in 2025, which economists believe would support economic sentiment and growth.
·????? In October, US consumer sentiment reached a six-month high, rising to 70.5 from 70.1 in September, driven by increased optimism around buying conditions and slightly reduced financing costs. This improvement in sentiment was recorded in the University of Michigan’s final index reading, which outpaced the preliminary 68.9 figure. Consumers' inflation expectations remained stable, with a one-year outlook of 2.7% and a long-term projection slightly down to 3% from 3.1% in the previous month.
Optimism for durable goods purchases rose to a four-month high, as over half of consumers expect interest rates to decrease in the coming year. Household income expectations also strengthened to their highest since June, reflecting increased confidence in the labor market. While fewer consumers reported high interest rates as a deterrent to buying homes or big-ticket items, lower-income households still anticipated less income growth than higher earners.
The upcoming US presidential election is influencing sentiment, especially among Republican and independent voters, who reported their highest confidence since April, while Democratic sentiment saw a slight decline. This variation aligns with an increase in confidence among some Republicans and independents regarding former President Donald Trump’s potential victory, while fewer respondents foresee a win for Vice President Kamala Harris. The current conditions gauge rose to 64.9, while future expectations saw a slight decrease.
·????? In September, US housing starts dipped slightly by 0.5% to an annual rate of 1.35 million, primarily due to a decline in multifamily project starts, which dropped by 9.4%. Conversely, single-family home construction rose by 2.7% to an annual rate of 1.03 million, marking its strongest pace in five months. Despite this activity, overall building permits—a leading indicator of future construction—fell by 2.9%.
Meanwhile, the housing market saw a continued struggle with elevated mortgage rates, dampening demand. Both purchase and refinancing applications hit their lowest levels since August, with purchase applications declining 5.1% and refinancing down 8.4%.
Sales of existing homes also dropped, reaching an almost 14-year low, as prospective buyers held out for more attractive financing options. In September, contract closings fell by 1% to a 3.84 million annualized rate, as buyers hesitated to commit in the face of mortgage rates in the mid-6% range. Despite a more than 20% increase in available inventory from a year ago, the ongoing “lock-in effect”—where homeowners avoid listing homes to retain lower mortgage rates—contributed to limited sales activity.
New-home sales, however, saw a 4.1% rise to an annualized rate of 738,000, a 14-month high, thanks to lower rates early in the month and various incentives from builders. However, analysts caution that the upturn may be temporary, as rates have recently climbed again. Builders have been managing high inventories by offering incentives like price discounts and mortgage-rate buydowns. With the average price for a new home holding steady at around $426,300, affordability remains challenging.
Mortgage rates continue their upward trend, with the average 30-year fixed rate reaching 6.54%, the highest since early August. This increase follows rising yields on 10-year Treasuries and heightened market expectations of a cautious Federal Reserve rate path.
·????? The New York Fed Staff Nowcast model slightly downgraded its U.S. GDP growth forecast for Q3 2024 to 2.91%, down from 3.00% a week ago, primarily due to a negative surprise in manufacturers’ shipments data. Similarly, the Atlanta Fed's GDPNow model revised its estimate to 3.3%, down from 3.5%.
Euro zone
·????? European central bankers are increasingly concerned about the potential economic impact if Donald Trump wins the upcoming U.S. presidential election on November 5. Policymakers fear that his proposed trade policies, particularly significant tariffs on imports, could exacerbate existing economic challenges in Europe.
Trump has pledged to impose a 60% tariff on goods from China and up to 20% on imports from other countries. Such measures would represent the most substantial trade shock since the Smoot-Hawley Act of the 1930s, which deepened the Great Depression. Central bankers worry that these tariffs would disrupt global trade, leading to decreased exports, higher inflation, and slower economic growth in Europe.
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The European Central Bank and other European policymakers are particularly anxious because Europe's economy is currently weaker than during Trump's previous tenure. In 2017, the eurozone experienced its strongest annual growth in a decade. In contrast, Germany is now facing its second consecutive annual contraction, and France is implementing €60 billion ($65 billion) in spending cuts and tax increases. The United Kingdom, despite outpacing other G7 nations in the first half of 2024, is experiencing a cooling economy that is prompting investors to anticipate faster monetary easing.
Analysts estimate that a universal 10% U.S. tariff could reduce the eurozone's annual exports to the U.S.—valued at €460 billion—by nearly one-third, cutting economic output by 1.5 percentage points over three years. This impact would be comparable to the recent energy crisis that Europe faced.
The potential tariffs could also weaken the euro significantly. The euro has already been declining, and there is speculation that it could reach parity with the U.S. dollar. Deutsche Bank's global head of FX research, George Saravelos, suggested that a trade war involving China could push the euro down to $1.00. As of now, the euro is trading around $1.08. Moreover, Goldman Sachs analysts projected that if Trump and the Republicans win the election and implement high global tariffs alongside domestic tax cuts, the euro could depreciate by as much as 10% against the dollar, potentially falling below parity to around $0.97—the lowest level since late 2022. They also predict that the Chinese yuan could weaken by 12%, potentially reaching 8 yuan per dollar.
European Central Bank President Christine Lagarde has expressed concerns about the potential for new trade barriers to pose a "downside risk" to Europe's already struggling economy. The ECB has recently cut interest rates twice in a row to stimulate growth, with the most recent cut sparking bets on even more aggressive reductions. The combination of trade uncertainties and monetary policy easing is putting additional downward pressure on the euro.
Financial markets are reacting to these developments. Hedge funds have increased their bearish bets against the euro, becoming the most negative on the currency in two months. Options traders are also ramping up bets against the euro.
European policymakers are preparing for potential retaliatory measures. The European Union has drafted a list of American goods that could be targeted with tariffs if Trump imposes punitive trade measures on the bloc. While the EU prefers to seek agreements on common interests such as China, it stands ready to respond to protect its economic interests.
In addition to trade concerns, central bankers are worried about the implications for inflation and monetary policy. A stronger dollar resulting from trade tensions could increase the cost of imported goods in Europe, potentially leading to higher inflation. Bundesbank President Joachim Nagel noted that such a scenario could prompt the ECB to consider further monetary easing to support the economy.
·????? Private-sector activity in the euro area remained sluggish in October, with the composite PMI by S&P Global barely improving to 49.7 from 49.6 in September, staying below the growth threshold of 50. The ongoing weakness in the euro area’s economy, especially in Germany and France, continues to raise concerns of a return to stagnation after a robust start to 2024. German manufacturing is particularly impacted by higher energy costs and sluggish demand from China, while France’s economic situation deteriorated further, reflecting broader regional challenges in consumption.
Analysts warn that GDP growth risks for the euro area are skewed to the downside for the last quarter of the year, despite advanced disinflation. Investors have reacted by pricing in further monetary easing, with expectations that the ECB will lower the deposit rate to 2% by mid-2025, down from the current 3.25%. Market speculation now suggests a 50% chance of a half-point cut in December, though economists argue a more cautious 25-basis-point reduction is likely due to persistently high inflation in the services sector driven by wage pressures.
Meanwhile, Germany and France, continued to contract, although Germany showed signs of a possible rebound in growth. Germany’s private sector contraction slowed, with the PMI rising from 47.5 to 48.4, a better-than-expected result but still below the threshold for expansion. According to Cyrus de la Rubia, economist at Hamburg Commercial Bank, stronger growth in services and a slower contraction in manufacturing indicate a potential for economic expansion in Germany during the fourth quarter.
France, however, saw a deeper downturn as demand weakened sharply, particularly in manufacturing. The country’s PMI dropped further to 47.3, countering analysts’ expectations for improvement. France’s economic challenges, exacerbated by upcoming tax hikes and spending cuts to address the budget deficit, add to its struggle to emerge from a prolonged decline. Economist Tariq Kamal Chaudhry remarked that France remains trapped in stagnation, with the fourth quarter carrying over previous issues despite recent elections.
·????? Inflation expectations among euro zone consumers continued their decline in September, providing optimism for the ECB that it could reach its 2% inflation target sooner than anticipated. Consumers now expect prices to rise by 2.4% over the coming year, down from 2.7% in August, marking the lowest level since September 2021. Expectations over a three-year period also dropped, to 2.1% from 2.3%, just above the ECB’s target.
This trend aligns with ECB officials advocating for a faster pace in reducing interest rates, as policymakers discuss the potential for substantial rate cuts to stay ahead of further economic cooling. With inflation now down to 1.7%, investors are increasingly betting on accelerated monetary easing, expecting the deposit rate to decrease to 2% by mid-next year. However, consumers remain pessimistic about the broader economy, anticipating a 0.9% contraction over the next year, a sentiment unchanged from the previous month.
·????? Germany’s economic outlook brightened in October, as business sentiment rose and hopes grew that the prolonged economic downturn may be nearing an end. The Ifo institute’s expectations index reached 87.3, its highest since June, signaling cautious optimism, particularly in services like tourism, IT, and logistics, although the manufacturing sector remains hindered by elevated energy prices and a challenging shift to electric mobility.
Bundesbank’s assessment echoed this cautious outlook, noting the likelihood of stagnation for the rest of the year following a slight GDP contraction in the third quarter. The central bank expects this sluggish phase, ongoing since mid-2022, to continue but does not foresee a severe recession. In the labor market, wages have started rising faster than inflation, but consumers remain wary of increasing spending. The Bundesbank highlighted elevated wage demands amid reduced inflation, which could maintain pressure on inflation control efforts. However, it also emphasized that Germany’s path toward disinflation depends significantly on labor-market developments and productivity.
In an effort to stimulate growth, Economy Minister Robert Habeck proposed the “Germany Fund,” aimed at boosting private investment through a 10% subsidy on qualified projects. This plan, part of a broader modernization strategy, would direct funds toward green technologies, innovation, and infrastructure improvements, excluding building projects. The fund, however, is not yet policy and faces resistance within the ruling coalition. Finance Minister Christian Lindner has been wary of further subsidies, advocating instead for fiscal discipline. This proposal, viewed as a five-year plan, is intended to finance climate-neutral investments, infrastructure, education, and digitalization projects, areas estimated to require over €200 billion by 2030. The German government is at a crossroads, with both targeted investments and fiscal conservatism under consideration to revive Europe’s largest economy.
·????? France submitted a comprehensive plan to reduce its budget deficit, aiming to reach 2.8% of GDP by 2029, down from 6.1% in 2024, based on growth projections of 1.1% in 2024 and accelerating to 1.5% by 2027. This effort reflects a commitment to fiscal discipline as the nation attempts to rebuild investor confidence and comply with EU fiscal requirements. This strategy, submitted to the EU to secure a seven-year extension for meeting these goals, relies on projections for modest growth and includes structural reforms such as raising the retirement age.
However, the IMF expressed skepticism regarding France’s fiscal trajectory, forecasting the deficit to remain near 6% until 2029. It recommends a “frontloaded” fiscal adjustment to address ongoing public debt concerns, which it expects to exceed 124% of GDP by 2029.
Concurrently, Moody’s placed France’s Aa2 credit rating on a negative outlook, marking the third caution in two weeks regarding the country’s worsening public finances and political challenges in managing its budget deficit. Moody’s decision highlights rising risks, stating that France may struggle to implement effective measures to prevent larger-than-expected deficits and deteriorating debt affordability. The rating agency’s concerns follow similar actions from Fitch, which also issued a negative outlook recently, and Scope, which downgraded France last week. S&P’s next assessment is expected on November 29, following its downgrade earlier this year.
According to Moody’s, France’s deficit is likely to exceed 6% of GDP this year, with little confidence in the government’s aim to reduce it to 5% by 2025 due to the substantial fiscal adjustments required. The rating agency emphasizes that any failure to enact a credible medium-term fiscal strategy could result in further downgrades. Additionally, Moody’s warned against reversing reforms that President Emmanuel Macron has introduced since 2017, noting that backtracking on these changes would weaken fiscal stability.
UK
·????? Britain’s private sector growth decelerated in October, as concerns over the upcoming budget and global political uncertainties weighed on sentiment. The S&P Global PMI for the UK fell to 51.7, down from 52.6 in September, marking the lowest level in almost a year, though still above the threshold indicating expansion. Business confidence has been shaken by the Labour government’s warnings about a difficult fiscal inheritance and potential tax increases to address a projected £22 billion deficit. This uncertainty has caused many companies to hold off on significant investment decisions.
Consumer confidence also slipped amid uncertainty over Labour’s first budget, and GfK’s consumer confidence gauge declined to -21 in October. The “vibecession” phenomenon, seen in the US, has also emerged in the UK, where economic data reflects improvement, but sentiment remains low due to inflationary pressures and higher borrowing costs. Despite inflation easing to 1.7% in September—below the Bank of England’s target for the first time in three years—consumers remain cautious. With 70% of households planning to reduce spending, confidence in the economy is being further eroded, even as retail sales showed a temporary boost from clothing and electronics purchases.
Meanwhile, the IMF upgraded its UK growth forecasts, projecting 1.1% growth in 2024, up from a previous forecast of 0.7%, largely due to easing inflation and interest rates. However, it also cautioned the government about rising debt levels, expected to reach 96.4% of GDP by 2029. As Chancellor Rachel Reeves prepares her inaugural budget, she faces the challenge of balancing increased borrowing—potentially up to £25 billion annually—to fund extensive infrastructure and public service investments with the need to manage debt levels. The IMF stressed the importance of careful fiscal planning, warning that delaying debt consolidation could lead to market-driven adjustments with significant economic consequences.
Asia
·????? In October, Japan’s private sector experienced a notable contraction, the first in four months, suggesting a potential slowdown in GDP growth for the final quarter of 2024. The au Jibun Bank Flash Japan Composite PMI fell to 49.4 from 52.0 in September, marking the steepest decline since November 2022 and signaling a contraction in economic activity. Both services and manufacturing saw reductions, with services experiencing its sharpest drop since February 2022 due to declining export demand. Manufacturing also continued to struggle, with output shrinking for a second month and export orders falling at the fastest pace since March, reflecting the impact of slowing global demand for goods.
This downturn in private sector activity is compounded by rising inflationary pressures, presenting a dilemma for the Bank of Japan (BOJ) as it considers its monetary policy stance. Input costs rose due to higher prices for materials, labor, and energy, driving selling price inflation upward for the second consecutive month. This increase in costs was more pronounced in manufacturing but still significant across both sectors, with inflation levels exceeding long-term averages. Survey data suggests that inflation may remain around the BOJ's 2% target, which supports the central bank’s hawkish bias. However, the slowdown in private sector growth and diminishing consumer demand may prompt the BOJ to hold off on policy changes until early 2025.
Meanwhile, inflation in Tokyo moderated below 2% in October for the first time in five months, primarily due to a decrease in energy costs. Consumer prices in Tokyo, excluding fresh food, rose by 1.8%, slightly above forecasts of 1.7%. Government subsidies on energy shaved 0.51 percentage points off the price index, highlighting a technical factor behind the softer inflation reading. Yet, a deeper measure of inflation that excludes energy showed underlying inflationary pressures, with prices rising from 1.6% to 1.8% in October. Food prices rose sharply, as nearly 3,000 items saw increases, while service prices grew by 0.8% year-over-year, partly due to Japan Post’s first rate hike for ordinary mail in 30 years.
·????? China’s recent economic stimulus efforts, led by President Xi Jinping, was met with skepticism by global financial leaders at the IMF and World Bank meetings in Washington. Key figures, including US Treasury Secretary Janet Yellen and IMF Managing Director Kristalina Georgieva, expressed concerns that Beijing’s measures, such as interest rate cuts, increased liquidity for banks, and support for the housing sector, lack sufficient scope to address underlying economic challenges like overcapacity and weak domestic demand. Georgieva warned that without stronger consumer-focused reforms, China’s growth rate could drop “way below” 4% in the future, deviating significantly from the nation’s official target of around 5%.
Despite recent measures, China’s economic strategy has not yet shifted toward significant consumer stimulus. Instead, Beijing continues its emphasis on industrial and manufacturing upgrades, as observed by Haibin Zhu, chief China economist at JPMorgan Chase. Zhu noted that recent moves are more about risk management than major stimulus, falling short of the aggressive "whatever it takes" approach seen in past crises, such as the 4 trillion yuan package in 2008. For investors hoping to see a pivot toward boosting domestic consumption, there is growing doubt that Beijing will abandon its industrial-focused policy agenda.
Vice Finance Minister Liao Min, who led discussions in Washington, outlined that upcoming legislative meetings in early November could reveal more definitive fiscal policy details. These could potentially include a large fiscal package focused on expanding domestic demand and stabilizing growth. Some analysts speculate this package could reach up to 5 trillion yuan over several years to tackle local debt restructuring, recapitalize banks, and address budget shortfalls.
·????? India’s economy picked up speed in October, as both manufacturing and services saw increases, according to a preliminary survey by HSBC Holdings Plc. The manufacturing PMI rose to 57.4 from 56.5 in September, marking the first rise since June, while the services PMI edged up to 57.9 from 57.7. This led the composite index, which combines the two sectors, to increase slightly to 58.6 from 58.3, indicating continued expansion in economic activity as readings above 50 signify growth.
The renewed momentum was largely driven by a strong uptick in new orders, both domestically and for exports, suggesting positive signs for industrial production in the closing months of 2024. However, input price inflation has continued to pressure manufacturers’ profit margins, raising concerns over the potential impact on costs.
Foreign Exchange Markets
The Dollar Index, which measures the value of the U.S. dollar against a basket of major currencies, gained 0.7% over the week, as a series of positive economic data has tempered expectations about the size and speed of the Fed's rate cuts and contributed to rising U.S. Treasury yields. Additionally, hedge funds and speculative traders have shifted from bearish to bullish on the dollar, betting on its strength as they anticipate continued outperformance of the U.S. economy.
Commodities and Energy Markets
In the commodities sector, most assets ended the week with positive movements.
Oil prices rose over the week, driven by ongoing tensions in the Middle East, as traders closely monitored geopolitical risks, including the potential for escalation in the region. The U.S. has communicated support to Saudi Arabia, the largest OPEC producer, offering assistance in its defense should regional conflicts worsen. Meanwhile, Iran has reportedly prepared its military for possible conflict while simultaneously attempting to avoid it. The market remains on edge, partly due to the lack of progress in cease-fire discussions, which could have helped temper volatility.
Debt and Fixed Income Markets
Market Movements
According to CME data, the implied Fed Funds rate curve for the next 18 months (until March 2026) has shifted upward by an average of 9 basis points.
The flattening of the U.S. Treasury yield curve, marked by a 17-basis-point rise in 10-year bond yields to 4.25% and a 13-basis-point increase in 30-year yields to 4.51%, reflects shifting market expectations potentially linked to the upcoming U.S. presidential election. Analysts partly attribute this movement to betting markets leaning towards a potential Trump victory, which is expected to bring expansionary fiscal policies, particularly through tax cuts.
Central Bank Insights
·????? Bank of Japan Governor Kazuo Ueda signaled a strategic approach to further rate hikes, expressing a careful consideration of timing and scale in adjusting Japan’s longstanding easy monetary policy. Speaking at the IMF and World Bank meetings, Ueda highlighted the importance of avoiding prolonged low rates that could spur speculative market positions, implying a gradual approach to rate hikes.
Most economists expect the BOJ will maintain its current benchmark rate at the upcoming policy meeting on October 31 but foresee a possible hike in December or January. Analysts will closely observe this meeting for potential indicators of policy direction, especially in the context of global economic uncertainties and fluctuations in the yen.
·????? The Bank of England is contemplating a shift in its monetary policy, weighing the pace and timing of interest rate cuts in response to faster-than-expected disinflation in the UK. Governor Andrew Bailey highlighted that inflation rates are dropping more rapidly than anticipated, bolstering market expectations for a rate cut in the central bank’s upcoming November meeting. Bailey expressed cautious optimism, noting that lower inflation could allow for a quicker shift toward rate cuts. He acknowledged, however, that lingering questions about structural changes in the UK economy, particularly in services inflation and labor market tightness, could complicate the BOE’s approach. Services inflation, at nearly 5%, remains a sticking point, as does the labor market, which, while loosening, is still tight by historical standards.
The BOE’s current policy stance may face resistance from policymakers advocating a more conservative approach. Monetary Policy Committee member Megan Greene favored a “cautious, gradual approach” to cutting rates, given concerns over the UK’s tepid consumer spending recovery. Greene suggested that the current rate-cutting cycle could reduce households' tendency to save, potentially stimulating demand. However, with UK consumption only slightly above pre-pandemic levels, Greene remains wary of moving too quickly on rate reductions. She emphasized that higher borrowing costs have made consumers cautious, particularly with many households refinancing mortgages at elevated rates, which could limit the effectiveness of rate cuts in boosting spending.
Both Bailey and Greene acknowledge a shift in the BOE’s long-term approach to interest rates. Greene noted that the neutral rate, the level that neither stimulates nor restrains the economy, has likely risen since the pandemic. She pointed out that post-crisis factors, such as reduced investment since Brexit, have kept the UK economy’s growth potential low, with GDP growth above 1% capable of driving inflation. Greene’s stance reflects a consensus among central bankers that rates will need to remain higher than pre-pandemic levels to control inflation sustainably, a view Bailey echoed in his recent discussions.
·????? The European Central Bank finds itself at a pivotal moment as it navigates the complex interplay of slowing inflation, weakening economic growth, and the appropriate pace of monetary easing. Recent developments intensified debates among policymakers about the future direction of interest rates, with discussions centering on whether to continue with gradual cuts or consider more aggressive measures to stimulate the euro-area economy.
ECB President Christine Lagarde emphasized that while the "direction of travel is clear," referring to the path of lowering borrowing costs, the pace at which rates will be reduced remains a subject of careful deliberation. Lagarde acknowledged that disinflation is progressing and that inflation has slowed to below the ECB's 2% target, a development she describes as "relatively reassuring." However, she cautions against fixating on the size of rate cuts, underscoring the importance of making decisions based on both backward- and forward-looking data.
Among the Governing Council members, there is a spectrum of opinions reflecting the delicate balance between supporting economic growth and ensuring inflation remains on target. Gediminas Simkus of Lithuania asserts that the direction toward less restrictive monetary policy is evident but urges patience until December's data provides clearer insights. He downplays the necessity of larger cuts, stating, "I don't see a case for 50 basis-point cuts," and highlights the significance of where rates will ultimately settle over the specific size of each cut.
Contrastingly, Martins Kazaks of Latvia suggests that all options should be on the table, including the possibility of larger reductions. He expresses concern over the euro-zone economy's weakness, labeling it his "single biggest concern," and warns that holding rates too high for too long could inflict unnecessary damage. Kazaks notes that if inflation continues to undershoot forecasts, the ECB might reach its 2% target sooner than anticipated, warranting adjustments to the monetary policy stance.
Mario Centeno of Portugal echoes the call for considering steeper cuts, especially in light of the absence of a meaningful economic recovery and mounting risks to the outlook. He argues that the ECB should "remove all shackles from the euro-zone economy as quickly as possible" to encourage spending and investment before rising unemployment hampers a growth rebound. Centeno believes that the combination of low inflation and weak growth justifies a discussion on moving beyond the traditional quarter-point adjustments.
On the other hand, policymakers like Joachim Nagel of Germany advocate for a more cautious approach. Nagel stresses the importance of not being "too hasty" and suggests that the ECB should keep all options open without committing to larger cuts prematurely. He emphasizes reliance on incoming data and projections, maintaining that "we keep our flexibility in every direction" and that decisions should be made based on careful analysis rather than speculation.
Similar sentiments are shared by Gabriel Makhlouf of Ireland, who prefers a measured pace of easing. He advises reserving significant rate cuts for exceptional circumstances, noting that "the data has to be very powerful" to justify a more aggressive move. Makhlouf highlights the need for prudence to ensure that the retreat of inflation to the 2% target stays on track, especially given persistent concerns like services inflation.
Other officials, such as Fabio Panetta of Italy and Francois Villeroy de Galhau of France, acknowledge the progress in disinflation but also point to the risks of inflation undershooting the target if growth remains subpar. Panetta suggests that the ECB might need to lower borrowing costs below the neutral level—a rate that neither stimulates nor restricts the economy—if conditions warrant. Villeroy de Galhau underscores the need for agility in policy decisions to avoid acting too slowly, advocating for a forward-looking approach based on forecasts rather than solely on current data.
The concept of the neutral rate adds another layer of complexity to the policy discussions. Estimates of this rate vary, with some ECB staff placing it between 2.2% and 2.8%. The uncertainty surrounding the exact level of the neutral rate complicates decisions on how far and how quickly to adjust interest rates. Policymakers like Olli Rehn of Finland caution that while the economy shows signs of weakening, services and wage inflation remain above target, suggesting that the ECB should be mindful of both upside and downside risks.
Market participants are closely watching these debates, with traders increasingly betting on the possibility of a larger, half-percentage-point cut at the ECB's final meeting of the year. This speculation has been fueled by Reuters report that the ECB is beginning to debate whether rates need to be lowered enough to start stimulating the economy actively. The bond markets have reacted accordingly, with European short-dated bonds rallying as expectations shift toward more substantial easing.
Amid these discussions, there is a consensus that decisions should remain data-dependent, with many officials advocating for a step-by-step approach. Boris Vujcic of Croatia and Bostjan Vasle of Slovenia emphasize the importance of waiting for incoming data before making definitive policy choices. They argue against pre-committing to specific actions, highlighting that flexibility has served the ECB well in navigating uncertain economic conditions.
·????? Federal Reserve officials are signaling a cautious and measured approach to lowering interest rates, emphasizing the need to balance risks amid an uncertain economic environment.
Dallas Fed President Lorie Logan advocates for gradually reducing rates toward a more neutral level to manage risks to both inflation and the labor market. She underscores the importance of remaining nimble, as unforeseen shocks could influence the path of policy adjustments. Logan also addresses liquidity in financial markets, noting that while the use of the Fed's overnight reverse repurchase facility has been declining, it still provides a buffer of excess liquidity. She suggests that if balances in this facility do not decrease as expected, it may be appropriate to adjust its interest rate. Logan highlights the ongoing reduction of the Fed's balance sheet and discusses the role of mortgage-backed securities, which remain substantial but are intended to diminish over time in favor of holding mostly Treasuries.
Minneapolis Fed President Neel Kashkari echoes the sentiment for a slower pace of rate reductions. While he supported the larger-than-normal rate cut in the previous month, he anticipates more modest cuts in the coming quarters, contingent on economic data. Kashkari emphasizes the need for real evidence of a significant weakening in the labor market before considering more rapid rate reductions.
Kansas City Fed President Jeffrey Schmid also favors a cautious approach, supporting gradual rate cuts to find the neutral rate without causing undue financial market volatility. He observes a normalization in the labor market, with employers reducing aggressive hiring practices and no longer hoarding workers as they did post-pandemic. Schmid notes that interest rates may settle at levels higher than those seen before the pandemic due to factors like increased productivity, investment, and government debt, despite the persistent structural forces such as an aging population.
San Francisco Fed President Mary Daly expects the central bank to continue reducing interest rates to prevent further weakening of the labor market. She views the current interest rate as tight for an economy on a path to 2% inflation and stresses the importance of adjusting policy to fit the evolving economic conditions. Daly supported the recent half-point rate cut, describing it as a close call but ultimately necessary.
Federal Reserve Governor Christopher Waller suggests that recent economic data allow for a less urgent approach to rate reductions than was applied previously. With robust hiring and a decrease in the unemployment rate, alongside inflation that remains above the 2% target, Waller believes the Fed can proceed toward a neutral policy stance at a deliberate pace. He notes that the economy may not be slowing as much as desired and highlights the need to monitor upcoming data to confirm or adjust his inclination for caution in easing monetary policy.
Cleveland Fed President Beth Hammack acknowledges progress in lowering inflation but cautions that the mission is not yet complete, as inflation still exceeds the Fed's 2% objective. She points to potential factors that could reignite price pressures, such as geopolitical events affecting energy prices and persistent inflation in housing services due to gradual rent increases for existing tenants. Hammack emphasizes that while the path to reducing inflation has not been linear, the Fed has managed to cool price growth while maintaining strength in the labor market and the broader economy.
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