Global Markets Weekly Wrap KW 41 : US Stocks Hit Record Highs as Earnings Season Surprises Investors

Despite the strong earnings season start, several economic reports released over the week were less than encouraging. Inflation came in slightly higher than expected, which worried investors. On Thursday, the U.S. Labor Department reported that headline inflation, which excludes volatile food and energy prices, increased by 0.2% in September, with core inflation rising by 0.3%. On a year-over-year basis, core inflation was 3.3%, up from 3.2% in August, marking the first increase in this metric since March 2023. Notable price increases in medical care services (up 0.7%) and transportation services (up 1.4%) offset a decline in energy prices, which fell by 1.9%.

Additionally, the weekly jobless claims report showed a surprise increase. Initial claims for unemployment benefits rose to 258,000, the highest level in over a year. Continuing claims also rose, reaching 1.86 million. Some of this increase was attributed to Hurricane Helene, which disrupted business operations. Another concerning report was the University of Michigan's preliminary consumer sentiment index for October, which showed a decline as consumers grew more cautious about their personal finances.

Changing Rate Cut Expectations

The modest inflation uptick led to a shift in expectations regarding the Federal Reserve's next move on interest rates. As of the end of the week, futures markets priced in a 14.1% chance that the Fed would leave rates unchanged at their November meeting. Minutes from the Federal Reserve's last policy meeting, released on Wednesday, indicated that several officials preferred a smaller 25-basis-point rate cut instead of the 50-basis-point reduction that was ultimately implemented.

Bond yields also rose following the release of inflation data. The yield on the 10-year U.S. Treasury note reached 4.12%, its highest level since July 31. Rising bond yields typically indicate lower bond prices, as the two move in opposite directions. In the corporate bond market, new issuance remained strong, with many bonds being oversubscribed despite the rising interest rates. However, some weakness was observed in the high-yield bond market as equities pulled back earlier in the week.

European Markets

In Europe, stock markets performed well over the week. The pan-European STOXX Europe 600 Index gained 0.66%, driven by hopes that the European Central Bank (ECB) might cut interest rates more quickly. This optimism also helped push major indices in Italy, Germany, and France higher, with Italy's FTSE MIB rising by 2.13%, Germany's DAX up 1.32%, and France's CAC 40 gaining 0.48%. However, the UK's FTSE 100 Index fell by 0.33%, reflecting more cautious investor sentiment.

In Germany, economic reports painted a less rosy picture. The Federal Ministry for Economic Affairs and Climate Action forecasted that the German economy would contract by 0.2% this year, down from earlier estimates of a 0.3% expansion. Factory orders also dropped sharply by 5.8% in August, well below the consensus estimate of a 2% decline. On the other hand, industrial production surprised analysts by rising 2.9%, largely due to a rebound in the automotive sector.

The ECB's minutes from its September meeting suggested that inflation was expected to slow toward the 2% target by the end of the year. While some officials hinted that the ECB might accelerate its rate-cutting cycle, the overall message remained cautious. Recent comments from ECB officials, including the heads of Greece and France's central banks, supported the idea that further rate cuts could come as early as October, with more reductions likely before the end of the year.

UK Economy and Japan's Markets

The UK economy showed signs of recovery in August, expanding by 0.2% after two months of stagnation. The growth was driven by an increase in manufacturing and construction output, which offset slower gains in the services sector. In Japan, stock markets experienced gains, with the Nikkei 225 Index rising by 2.45% and the broader TOPIX Index increasing by 0.45%. The weakening of the yen, which hovered in the high-JPY 148 range against the U.S. dollar, provided a favorable backdrop for Japanese exporters.

However, Japan's economic data was mixed. Real wages fell by 0.6% in August, marking the first decline in three months. This was partly due to the fading impact of summer bonuses. The drop in wages may delay any decision by the Bank of Japan (BoJ) to raise interest rates again, as consumer spending has yet to show a sustained increase. Household spending also declined by 1.9% year-over-year in August, although this was a smaller drop than economists had expected. BoJ officials reiterated their cautious approach, signaling that future rate hikes would depend on economic performance aligning with their projections.

China's Markets

Chinese equities had a challenging week, with the Shanghai Composite Index falling by 3.56% and the CSI 300 Index losing 3.25%. The Hang Seng Index in Hong Kong fared even worse, dropping by 6.53%. The market was closed for a holiday at the start of the week, but investor optimism over Beijing's stimulus measures waned as the week progressed. The government reiterated its plans to support economic growth through increased investment, but the absence of new details left investors disappointed.

The People's Bank of China (PBoC) introduced a new liquidity facility to help institutional investors buy stocks, but this move failed to significantly boost the market. Additionally, consumer spending over the holiday was weaker than expected, with spending growth lagging behind pre-pandemic levels.

Global Economic Outlook

The week concluded with a sense of cautious optimism in global markets. While earnings season started on a positive note in the U.S., concerns about inflation and the possibility of further rate hikes continued to weigh on investor sentiment. In Europe, the ECB's potential rate cuts offered some hope, while Japan and China faced mixed economic data. Overall, the markets remain in a state of flux, with many uncertainties still looming on the horizon. 

Checklist for the next week

Major economic events in the US include: Empire Manufacturing; Mortgage Applications; Retail Sales; Initial Jobless Claims; Industrial Production; Housing Starts; Building Permits
Major economic events around the world include: Japan Industrial Production; Spain CPI; Germany ZEW Expectations; Finland CPI; France CPI; Poland CPI; UK Jobless Claims Change