The week ahead
We look back at last week’s big events, and consider what’s happening in the week beginning 9th October.
Equities fight back
US stock indices had a dismal September, with all the majors posting significant losses for both the month and the third quarter. Investors are hoping for a better return in October, although the early indications haven’t been good. Equities came under repeated selling pressure as bond prices slumped. Yields (which move inversely to bond prices) on US government bonds (Treasuries) continued to soar. Midweek, the yield on the key 10-year Treasury note hit 4.88%, its highest level since August 2007. The speed of the rally in yields has rattled many investors who are concerned that the sudden jump could do serious damage, not just to credit markets, but to the overall global financial market. At the most basic level, higher yields mean higher borrowing costs. Given that US debt is currently at a record over $33.4 trillion, the move in bond yields is very concerning.
Data updates
Last week brought a clutch of US employment updates. JOLTS Job Openings came in above expectations which saw bond yields jump and stock indices fall. Then the ADP Private Payroll report came in well below expectations, leading to a fall in bond yields and a jump in equities. Weekly Jobless Claims were in line with expectations, and failed to move markets. Then on Friday we had the latest Non-Farm Payroll update. US stock indices slumped on the news of a 336,000 increase in September’s Non-Farm Payrolls. This was way above both the 170,000 expected, and the 187,000 prior reading, which itself was revised higher to 227,000. The sell-off came despite a small decline in Average Hourly Earnings, while the Unemployment Rate was steady at +3.8%. The yield on the 10-year Treasury note jumped by more than 10 basis points. Two things have now become apparent. When it comes to economic data, bad news is good for equity markets. And bond yields and the US dollar are crucial signals as they hover around current levels.
Amazon court case
The Federal Trade Commission (FTC) is engaged in a landmark antitrust lawsuit against Amazon, accusing the company of attempting to monopolise the e-commerce marketplace. Amazon is accused of developing a secret algorithm which showed how much they could raise prices while persuading competitors to follow suit. While Amazon hasn’t used the algorithm since 2019, the FTC and 17 states accuse it of being a monopolist.
🔸 Looking ahead to next week
Once again, the week starts off quietly with relatively little on the calendar. There are some partial bank holiday closures for the US, Japan and Canada on Monday, and also a couple of FOMC speakers on Monday and Tuesday. But we click up a few gears on Wednesday with US inflation data in the form of the Producer Price Index (PPI) and then minutes from the September FOMC meeting. Then on Thursday we have the US Consumer Price Index (CPI) which is really the main inflation measure as far as investors are concerned. Bear in mind that it was last month’s hotter-than-expected CPI which triggered the slump in equities which ran through to the end of September. It’s worth bearing in mind that PPI typically leads the CPI when it comes to identifying any change or acceleration in trend.
Bonds and the Federal Reserve
The bond market has finally accepted that the US Federal Reserve means what it says when it comes to quashing inflation, that is, keeping interest rates ‘higher for longer’. This accounts for the sharp move up in Treasury yields, particularly at the longer end of the curve. Once again, the bond market finds itself having to adjust to the Federal Reserve rather than the other way round. The days of calling the Fed’s bluff over inflation being ‘transitory’ are long gone. Now it’s the Fed that’s moving the bond market, by insisting that their fight against inflation is far from over, despite rate hikes acting with a significant lag. And as recent data suggest, there are no obvious signs that the US economy is heading into a recession, which was the reason that many thought earlier this year that the Fed would be cutting by now. Instead, we’re hearing anguished cries that the Fed is ‘breaking something’ and will be forced into a swift about-turn, from hawkish to dovish. There are memories of the breakdown in the regional banks back in March, and fears that with rates even higher now, refinancing debt could be an insurmountable problem. The irony being that once the Fed does cut rates, this may be interpreted as a sign of desperation, and a reaction to some financial disaster, rather than a signal to buy equities.
Q3 earnings season
The third quarter earnings season begins this week. Picking out the most notable companies, PepsiCo reports on Tuesday, while on Thursday we have Delta Air Lines, Walgreens Boots Alliance, Esports Entertainment and Domino’s Pizza. On Friday, significant reports come from JP Morgan, Citigroup, Wells Fargo, United Health, BlackRock and the Taiwan Semiconductor Manufacturing Company.
Equities fight back
US stock indices had a dismal September, with all the majors posting significant losses for both the month and the third quarter. Investors are hoping for a better return in October, although the early indications haven’t been good. Equities came under repeated selling pressure as bond prices slumped. Yields (which move inversely to bond prices) on US government bonds (Treasuries) continued to soar. Midweek, the yield on the key 10-year Treasury note hit 4.88%, its highest level since August 2007. The speed of the rally in yields has rattled many investors who are concerned that the sudden jump could do serious damage, not just to credit markets, but to the overall global financial market. At the most basic level, higher yields mean higher borrowing costs. Given that US debt is currently at a record over $33.4 trillion, the move in bond yields is very concerning.
Data updates
Last week brought a clutch of US employment updates. JOLTS Job Openings came in above expectations which saw bond yields jump and stock indices fall. Then the ADP Private Payroll report came in well below expectations, leading to a fall in bond yields and a jump in equities. Weekly Jobless Claims were in line with expectations, and failed to move markets. Then on Friday we had the latest Non-Farm Payroll update. US stock indices slumped on the news of a 336,000 increase in September’s Non-Farm Payrolls. This was way above both the 170,000 expected, and the 187,000 prior reading, which itself was revised higher to 227,000. The sell-off came despite a small decline in Average Hourly Earnings, while the Unemployment Rate was steady at +3.8%. The yield on the 10-year Treasury note jumped by more than 10 basis points. Two things have now become apparent. When it comes to economic data, bad news is good for equity markets. And bond yields and the US dollar are crucial signals as they hover around current levels.
Amazon court case
The Federal Trade Commission (FTC) is engaged in a landmark antitrust lawsuit against Amazon, accusing the company of attempting to monopolise the e-commerce marketplace. Amazon is accused of developing a secret algorithm which showed how much they could raise prices while persuading competitors to follow suit. While Amazon hasn’t used the algorithm since 2019, the FTC and 17 states accuse it of being a monopolist.
🔸 Looking ahead to next week
Once again, the week starts off quietly with relatively little on the calendar. There are some partial bank holiday closures for the US, Japan and Canada on Monday, and also a couple of FOMC speakers on Monday and Tuesday. But we click up a few gears on Wednesday with US inflation data in the form of the Producer Price Index (PPI) and then minutes from the September FOMC meeting. Then on Thursday we have the US Consumer Price Index (CPI) which is really the main inflation measure as far as investors are concerned. Bear in mind that it was last month’s hotter-than-expected CPI which triggered the slump in equities which ran through to the end of September. It’s worth bearing in mind that PPI typically leads the CPI when it comes to identifying any change or acceleration in trend.
Bonds and the Federal Reserve
The bond market has finally accepted that the US Federal Reserve means what it says when it comes to quashing inflation, that is, keeping interest rates ‘higher for longer’. This accounts for the sharp move up in Treasury yields, particularly at the longer end of the curve. Once again, the bond market finds itself having to adjust to the Federal Reserve rather than the other way round. The days of calling the Fed’s bluff over inflation being ‘transitory’ are long gone. Now it’s the Fed that’s moving the bond market, by insisting that their fight against inflation is far from over, despite rate hikes acting with a significant lag. And as recent data suggest, there are no obvious signs that the US economy is heading into a recession, which was the reason that many thought earlier this year that the Fed would be cutting by now. Instead, we’re hearing anguished cries that the Fed is ‘breaking something’ and will be forced into a swift about-turn, from hawkish to dovish. There are memories of the breakdown in the regional banks back in March, and fears that with rates even higher now, refinancing debt could be an insurmountable problem. The irony being that once the Fed does cut rates, this may be interpreted as a sign of desperation, and a reaction to some financial disaster, rather than a signal to buy equities.
Q3 earnings season
The third quarter earnings season begins this week. Picking out the most notable companies, PepsiCo reports on Tuesday, while on Thursday we have Delta Air Lines, Walgreens Boots Alliance, Esports Entertainment and Domino’s Pizza. On Friday, significant reports come from JP Morgan, Citigroup, Wells Fargo, United Health, BlackRock and the Taiwan Semiconductor Manufacturing Company.
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