Weekly Markets Review
- Simplicity News Desk
- Nov 13, 2023
- 4 min read
13th November 2023
Markets last week
Equities rallied earlier in the week, spurred on by the ‘Peak Fed’ narrative (the dovish interpretation of the November US Federal Reserve (Fed) meeting), and further evidence of global disinflation. Jerome Powell’s hawkish comments on Thursday abruptly ended the longest winning streak for the US equity market in two years (more on this in the central bank section below). Stocks dusted themselves off on the last day of trading and ended the week with strength. The bond market mostly played its part to spur on the rally, with 10-year treasury yields coming off 16-year highs to settle around 4.65%, whilst the VIX (a measure of implied volatility in US equities that is impacted by sentiment and therefore a good measure of fear in financial markets, often referred to as the ‘fear index’) fell to a seven-week low.
In terms of sectors, technology names were the standout performers, with the ‘Magnificent Seven’ (Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla) taking centre stage yet again. Energy stocks languished as concerns grew around demand and oil prices fell. Earnings have been in the limelight, with Reuters reporting that US companies are set for their biggest year-over-year gain in quarterly earnings since the second quarter of 2022. Thus far, 81% of results have surpassed analysts’ expectations.
Thursday deserves more examination, as the heightened volatility had been put down to more than the Fed Chair’s comments, with the weaker than expected 30-year bond auction gaining attention. The national budget deficit grew to $1.7trn in fiscal 2023, (the 12 months through September), making it about $300bn more than the year before, according to the Congressional Budget Review. This has caused investors to focus more acutely on Treasury auctions in recent months. Contrarian commentators also speculate that the lack of demand simply has to do with the wide opportunity set available today. BMO Capital Markets even theorised that November is a typically bad month for 30-year bond auctions, as just 26% of new issuances have been strong since 2018.
Macroeconomic data was mostly negative, as US Consumer sentiment fell for the fourth month in a row, and household expectations for both near and long-term inflation rose yet again (five-ten-year expectations hit the highest level since 2011). Homeward bound, the UK economy flatlined but avoided recession, which is not too dissimilar to key countries within the eurozone. Across Asia, Japan’s Tankan Survey showed that manufacturer confidence rose for the first time since August, whilst service sector sentiment improved for the second month in a row. Meanwhile in China, the mood music soured as the country tipped back into deflationary territory with a -0.2% year-on-year consumer price index (CPI) print.
On the commodity markets, Brent fell to the lowest level in three months, at $81.43 per barrel, both on demand concerns following weaker global economic data, and due to the rise in US crude stocks. Gold retreated from recent highs to settle at $1,940.
The Week ahead
UK CPI inflation data for October is anticipated to show a significant fall, denoting substantial progress for the Bank of England’s battle against inflation.
Tuesday: US CPI
Our thoughts: The US CPI Data for November will be released on Tuesday, the recent weakening in the labour market would seem to point to a fall in inflation. Economists expect month-on-month inflation to fall from 0.4% in September to 0.1% for October. If this were to be the case it would reflect progress from the central bank's perspective on returning inflation back to their 2% target, validating their ‘wait and see’ policy, and in turn lowering the likelihood of a further hike in the December meeting.
Wednesday: UK CPI
Our thoughts: The UK’s CPI data on Wednesday could well be more impactful than the US or the EU’s, as the UK faces a greater inflation problem. Given the deteriorating economic backdrop, the UK CPI will be an important indication of the risk of stagflation in the UK. Consensus expectations are for a significant drop in year-on-year inflation, from 6.7% in September to 4.7% in October, and for core inflation (excluding volatile food and energy prices) to tick lower too.
Thursday: US industrial production
Our thoughts: Nonfarm payrolls came in significantly weaker than expected, the US services sector declined for the second consecutive month, and consumer sentiment fell further than anticipated. This recent data, and similar examples, have led some to believe that the Fed's rate hiking cycle is now certainly over. US industrial production is likely to take a slight drop, but any negative surprises could add to this recently accelerating narrative.
Friday: EU CPI
Our thoughts: The eurozone has seen a steep fall in inflation on the back of continuous rate hikes, inflation data releasing on Friday is anticipated to fall in line with recent trends.
Sources: FTSE, Canaccord Genuity Wealth Management
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