BIL INVESTMENT INSIGHTS

After a volatile week in which stronger-than-expected PMI data fuelled concerns over persistent inflation and higher interest rates, US equities still managed to finish in positive territory. Markets were buoyed by the launch of a new consumer-focused AI agent designed to act as a personal assistant, helping users manage budgets and optimise spending. European equities also edged higher, supported by leading indicators that continue to signal an improving economic backdrop.

Inflation concerns weighed on bond markets, pushing the 10-year US Treasury yield to its highest level since 2007. Fixed income assets found some respite later in the week as crude oil prices declined after reports that Iran had proposed a seven-day framework for reopening the Strait of Hormuz.

By Monday, however, the ongoing stalemate between the US and Iran had triggered a renewed rise in oil prices, reigniting expectations of further rate hikes and putting renewed pressure on both equities and bonds.

Another key development last week was the Trump-Xi summit in Washington. The two leaders agreed to launch a new dialogue on AI, with further discussions scheduled for late November. The two countries also extended their trade truce until 10 January. In addition, China secured lower tariffs on $30bn of goods exported to the United States, with reciprocal measures expected from Beijing. Discussions on increasing the flow of Chinese rare earth exports and easing restrictions on advanced US semiconductor exports made little progress, leaving these issues unresolved for now.

US PMI shoots for the moon

The US Composite PMI rose four a fourth month in a row in September, hitting 58 and indicating the quickest expansion in private-sector activity since July 2021. The gains were driven by the service sector (58.7 vs 56.5), which posted the strongest rise in output for over five years, while manufacturing also accelerated (56.7 vs 53.1). New orders grew further, thanks primarily to robust domestic demand. Companies took on more staff, and at a pace unseen since June 2022. Against this backdrop of robust activity, price pressures intensified, with input costs rising the most since October 2022 mainly due to higher fuel and transport costs though wage pressures were also noted to have picked up in many cases. Selling price inflation also intensified. The market took the data as a cue that the Federal Reserve would need to deliver another rate hike sooner rather than later. Futures now price in around a 70% probability of another 25bp hike late October.

Source: Bloomberg, BIL

Corporate activity rises across the Eurozone, while consumers grow more cautious

Despite ongoing geopolitical tensions, high energy costs, and rising interest rates, the Eurozone economy keeps pushing forward. The Composite PMI rose to 53.1 in September, up from 52.0 prior, and above market expectations of 51.7, according to flash estimates released on Wednesday. This marks a third month of expansion in business activity. With order books continuing to fill up, the data hints at sustained momentum heading into the fourth quarter, though businesses did express less optimism about the year ahead.

Digging into the details, the services PMI increased to 53, while manufacturing held steady at 52.7. The data confirmed that the fledgling manufacturing upturn is still intact, with output rising to 53.4 - its highest level in 55 months. Growth was supported by a renewed increase in new export orders and an increase in AI and defense spending.

Likely keeping the ECB on its toes, cost inflation accelerated, and output prices rose at a faster pace.

On the consumer side, the latest confidence reading produced by the European Commission weakened. The indicator fell from -15.5 in August to -16.5 in September. Rising prices, largely influenced by the continuation of the conflict in the Middle East, are thought to be a driving factor.

 

Source: Bloomberg, BIL

Calendar for the week ahead

Monday – BoJ Monetary Policy Meeting Minutes. China Industrial Profits.

Tuesday – Spain Inflation (Preliminary, September), Retail Sales and Business Confidence. Italy Industrial Sales and PPI. Eurozone Economic Sentiment, Consumer Confidence. France Unemployment. US JOLTs Job Openings, Conference Board Consumer Confidence and House Price Index

Wednesday – Japan Retail Sales and Industrial Production. China PMI. Germany Retail Sales and Unemployment. France Inflation Rate (Preliminary, September). Italy Business and Consumer Confidence, Inflation (Preliminary, September). Germany Inflation (Preliminary, September). US GDP Growth (Final, Q2), Personal Income and Spending (August).

Thursday – Japan Tankan Index (Q3), BoJ Summary of Opinions. Eurozone PMI (Final, September). Eurozone, UK Unemployment Rate. France OAT Auction. US Weekly Jobless Claims, ISM Manufacturing PMI (September).

Friday – Japan Consumer Confidence. Eurozone Inflation (Flash, September). Italy Retail Sales. US Nonfarm Payrolls, Unemployment and Average Hourly Earnings.

Sunday – Brazil General Elections. OPEC and non-OPEC Ministerial Meeting.

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