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Market Highlights
Wake me up when September ends
September is typically known as the worst calendar month for markets. This year, it might be true for US equities, but the same can't be said for Europe (that was May). Nonetheless, it was indeed a trying month for investors, as the “higher for longer” message from central banks finally sunk in, inflicting pain on bonds and equities alike.
Notably, a rout in government bonds pushed the 10-year Bund yield to close at a post-2011 high of 2.93%, and the US equivalent hit a post-2007 high of 4.6%. The VIX Index, Wall Street’s “Fear Gauge” spiked to levels unseen since May.
However, today, on the last trading day of the month, the market mood has tangibly brightened on better-than-expected inflation data on both sides of the Atlantic (covered below). Futures on the S&P 500 are rising, while Treasury yields are retracing.
Moving into the new month, while stocks might be trying to rise out of their gloom, the US Government is on the brink of entering a self-induced slumber. As it stands, there’s still no sign that the House and Senate will be able to agree on a new funding package, with current funding set to expire this Sunday, October 1. Failure to reach a deal would likely result in Government shutdown, whereby federal employees would be furloughed. Analysts expect a shutdown could shave up to 0.2pp from quarterly annualised growth for each week it lasts.
Perhaps even more concerning is that the Fed, which Jerome Powell has already said is “navigating by the stars under cloudy skies”, might not receive the government data releases it relies on to calibrate monetary policy. Amid the last shutdown in 2013, datapoints such as the employment report were delayed.
The markets and the Fed are eagerly awaiting Friday’s jobs report to assess how the US labour market is holding up under the pressure of tighter monetary policy.
Eurozone inflation nears a two-year low
Flash data released Friday revealed headline inflation in the Euro Area fell to 4.3% YoY in September. That’s the lowest level since October 2021 and was also below the market consensus of 4.5%.
Prices increased at a slower pace for services (4.7% vs. 5.5% in August), non-energy industrial goods (4.2% vs. 4.7%), and food, alcohol & tobacco (8.8% vs. 9.7%). Meanwhile, energy deflation accelerated (-4.7% vs. -3.3%), though elevated oil prices could soon reverse that trend. Brent crude rose above $97 per barrel on Wednesday as lower-than-expected US stockpiles stoked supply concerns.
The core inflation rate, which excludes volatile food and energy prices, also cooled, reaching 4.5% in September.
Markets welcomed the news, especially as the decline was fairly broad-based across components. Equity markets gained and government bond yields retreated, on hopes that the ECB’s string of rate rises is coming to a close.
Regional details (HICP, YoY):
On a similar note, earlier in the week, ECB Governor Villeroy said that the economy shouldn’t be tested to the point of breaking. He believes the ECB should focus on “the persistence of policy rather than the constant pushing of rates higher – duration rather than level”. With the main deposit rate now at an all-time high of 4%, Villeroy said that the danger of doing too much must be balanced with the risk of not doing enough.
US PCE inflation hits a two-year low
The Fed’s preferred inflation measure – the Core PCE Index – fell to 3.9% YoY in August, from 4.3% prior, in a sign that the fight against underlying inflation pressures is back on track after a summer spike.
US consumer confidence retreats
While the Fed might be taking the upper hand in the fight against the inflation, it seems it is not doing so without inflicting some pain in the economy.
On Wednesday, the Conference Board’s consumer confidence gauge was shown to have fallen sharply (103 vs. 108.7 in August) amid elevated credit card costs, a slightly tighter labour market, dwindling excess savings, and rising gasoline prices. The fact that student loan repayments will begin again in October is also weighing on sentiment. Most concerning was the fact that the future expectations index plummeted from 83.3 to 73.7. A below 80 for has historically signalled a recession within a year.
On Friday, a separate consumer sentiment report by the University of Michigan confirmed the deteriorating mood among households.
Consumption makes up 70% of US GDP and its enduring strength has served as one of the key rebukes of recession narratives.
IFO: German business sentiment worsens in September
Germany’s IFO survey, released Monday, showed sentiment in the Eurozone’s largest economy has deteriorated for five consecutive months.
- The headline sentiment index came in at 85.7, from 85.8 in August, representing one of the weakest readings of the last five years outside of the pandemic.
- The “current situation” index continued its downward trend
- Future expectations index barely budged (82.9 from 82.7).
Looking in more granular detail, sentiment worsened among service providers (-5.0 vs. -4.1) and construction firms (-31.3 vs. -29.8), but improved among manufacturers (-16.4 vs. -16.6).
On the whole, it seems that German businesses are slowly adopting the idea that the economy is in for a longer period of subdued growth. It faces not only a cyclical downturn as the impact of higher rates percolates into the real economy, as well as long-run structural issues that appear to be coming home to roost following the war in Ukraine.
Amazon doubles down on AI ambitions
Amazon announced that it will invest up to $4 billion in Anthropic, an AI safety and research company, as it seeks to become a key player in generative artificial intelligence. In return for the financial injection, Anthropic will shift most of its software to Amazon Web Services (AWS) data centres and use AWS Trainium and Inferentia chips to build, train, and deploy its AI models. The news tentatively rekindled optimism around the AI theme, giving the S&P 500 (and especially the Magnificent 7) a tentative boost.
Economic calendar for the week ahead
Monday – Japan Tankan Index (Q3). Eurozone, US, Japan, UK Manufacturing PMI (final, September). US ISM Manufacturing PMI (September).
Tuesday – Reserve Bank of Australia Monetary Policy Committee. US JOLTs Job Openings.
Wednesday – Japan, US, UK, Eurozone Composite PMI (final, September). Eurozone Retail Sales and PPI. US ISM Services PMI and Factory Orders. OPEC & Non-OPEC Ministerial Meeting.
Thursday – US Weekly Jobless Claims. Germany Balance of Trade. France and Spain Industrial Production. Spain Consumer Confidence.
Friday – Japan Average Earnings and Household Spending. Germany Factory Orders. Italy Retail Sales. US Unemployment Rate, Average Hourly Earnings and Nonfarm Payrolls.