Fin-X Weekly 14th October 2024

Stocks made gains last week despite rising bond yields and a stronger US dollar. The early American earnings reports were generally ahead of expectations, although there were also disappointing headlines from some large companies.

US inflation data was slightly firmer than expected but kept the Fed on track to cut by a quarter point at the next two meetings. Other global central banks cut rates or adopted a less hawkish stance, with the ECB also expected to cut this week.

Ahead of Friday's Chinese GDP data, the government unveiled further stimulus measures on Saturday and said more would follow. Australian employment, US retail sales and production figures, and Japanese CPI inflation will also be published this week, along with more international quarterly earnings reports.

Stocks finished the week higher despite a stronger US dollar and rising bond yields. The S&P500 closed above 5,800 for the first time, ending the week at an all-time closing high, while the Nasdaq Composite has yet to exceed the July peak.

JP Morgan and Wells Fargo added +5.2% and +7.1% over the week as they beat earnings forecasts. Loan growth remains sluggish, but JP Morgan reported a surprise increase in net interest margins. In contrast, the Tesla share price fell by -12.9%, wiping out this year’s gains after the company unveiled the ambitious Cybercab robotaxi disappointed analysts with too few details. Boeing announced that it would cut 10% of its workforce, or 17,000 jobs, and delay delivery of the first 777X aircraft due to the financial impact of strikes.

Shares in Rio Tinto slipped -3.9% after announcing that it has agreed to acquire US-listed Arcadium Lithium for $6.7 billion. Following the news, the sector received a boost, with the Global X Battery Tech & Lithium ETF finishing the week +2.0% higher in Australian dollar terms.

US Treasury yields continued to climb after last Friday’s stronger-than-expected non-farm payrolls report, perceived hawkishness in the FOMC minutes, and the latest inflation reports. The 10yr yield rose above 4.0% for the first time since early August.

Headline CPI was a little firmer than expected in September at +2.4% yoy but still slightly lower than August’s +2.5% annual increase as energy prices declined. Core CPI ex-food and energy rose by +3.3% yoy, also slightly above expectations. Shelter and food price rises accounted for more than three-quarters of the monthly increase, and more timely indicators of falling house prices suggest that inflation will continue to slow. However, services inflation remains relatively high. The "supercore" measure of services ex-housing has risen by +4.3% over the last year, down from +4.5% in August, suggesting it is too soon for the Fed to start aggressively easing. The news was followed by upside surprises in PPI on Friday and, following comments from several FOMC members, the market has moved to price at most -0.5% of cuts from the Fed before the end of the year, in line with Jerome Powell’s recently outlined base case.

Despite the rise in yields, there has been no shortage of data to undermine the strength in the non-farm payrolls. After both the ISM Manufacturing and Services reports showed employment in contraction, last week’s NFIB small business survey also showed sluggish hiring intentions, with the uncertainty index reaching the highest level on record. The uncertainty index is a composite based on the sum of “don’t know” and “uncertain” answers to six outlook-related questions. NFIB Chief Economist Bill Dunkelberg said, “Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines. Although some hope lies ahead in the holiday sales season, many Main Street owners are left questioning whether future business conditions will improve”. The headline optimism index (91.5) recorded the 33rd consecutive month below the 50-year average of 98.

Consumers are also less optimistic about future job prospects. After a recent weaker reading from the Conference Board, the University of Michigan survey dropped unexpectedly on Friday. At the same time, Federal Reserve figures showed that consumer credit growth slowed in August. Consumer credit is currently rising at the slowest pace since 2010, outside of the pandemic.

American growth and inflation are decelerating in line with other economies. As expected, the RBNZ cut interest rates by -0.5% to 4.75% last week. The Bank of Korea also cut by -0.25% to 3.25%, while the Reserve Bank of India held the policy repo rate at 6.5% but shifted its policy stance from a hawkish “withdrawal of accommodation” to neutral.

On Sunday Chinese CPI (+0.4% yoy) and PPI (-2.8% yoy) inflation figures both fell short of estimates. As Chinese authorities attempt to kickstart the economy, the finance minister announced new measures on Saturday and promised more to come. Local governments will be permitted to buy property to support prices, backed by an unspecified quantity of new government bonds. Low-income households will also be given subsidies, and state banks will be recapitalised. The measures were given a lukewarm reception as analysts hoped for more significant fiscal measures.

Conditions in Australia are comparatively upbeat, with the NAB business conditions and Westpac consumer confidence surveys both recording gains last month. Last week’s minutes hinted that the RBA might be less resistant to rate cuts in the coming months. On Thursday this week, September unemployment is expected to remain at 4.2%.

Besides the employment data and ongoing quarterly earnings reports, the ECB is expected to cut rates by -0.25% on Thursday to 3.25%. US retail sales and industrial production figures are also due to be released, along with Japanese CPI figures and Chinese activity data, including third-quarter GDP growth.