Global markets weekly update

U.S.

Stocks reach new highs as earnings season kicks off

The S&P 500 Index, Dow Jones Industrial Average, and S&P MidCap 400 Index all moved to record highs over the week, helped by some upside surprises to kick off earnings season. Shares in JPMorgan Chase and Wells Fargo rose on Friday after the banking giants reported smaller-than-feared declines in third-quarter profits, while the former managed a small increase in revenues. 

A solid rise in NVIDIA shares helped growth stocks outperform value stocks and compensate for a decline in Google parent Alphabet, following reports that the Justice Department was considering asking a federal judge to order a breakup of the company. Tesla was also weak following a skeptical response to the company’s highly anticipated unveiling of its new “robotaxis” and “robovans.”

Inflation modestly higher than expected

The earnings focus arguably offset several disappointing economic reports over the week. On Thursday, the Labor Department reported modest upside surprises in headline and core (less food and energy) inflation, which rose in September by 0.2% and 0.3%, respectively, both a tick above expectations. On a year-over-year basis, core prices increased 3.3% in September versus 3.2% in August, marking the first increase since March 2023. Sharp increases in the seasonally adjusted prices of medical care (up 0.7%) and transportation (up 1.4%) services offset a 1.9% decline in energy prices.

Also on Thursday, the Labor Department reported a surprise jump in weekly jobless claims to 258,000, the highest level in 14 months. While disruptions from Hurricane Helene were partly to blame, Michigan also recorded substantial job losses. Continuing claims also rose to their highest level (1.86 million) since late July. Relatedly, perhaps, the University of Michigan’s preliminary gauge of consumer sentiment in October fell back unexpectedly as those surveyed expressed more caution about their personal finances.

Hopes fade for another half-point rate cut

The upside consumer inflation surprise led to a significant change in expectations for the Federal Reserve’s next policy meeting in November, with futures markets ending the week pricing in a decent (14.1%) chance of the Fed keeping rates steady, according to the CME FedWatch Tool. Minutes from the Fed’s last policy meeting, released Wednesday, also revealed that several members preferred only a 25-basis-point (0.25 percentage points) rate cut as opposed to the 50-basis-point cut announced despite only one member officially dissenting.

Long-term bond yields also rose in the wake of the inflation data, with the yield on the benchmark 10-year U.S. Treasury note hitting its highest intraday level (4.12%) since July 31. (Bond prices and yields move in opposite directions.) According to T. Rowe Price traders, new issuance in the tax-free municipal market remained elevated but was met with healthy demand, while issuance in the investment-grade corporate bond market was also mostly oversubscribed. The pullback in equities early in the week was reflected in some modest softness in the high yield market, however.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.66% higher amid hopes that the European Central Bank (ECB) could cut interest rates more quickly and that China could increase its economic stimulus. Major stock indexes rose. Italy’s FTSE MIB climbed 2.13%, Germany’s DAX gained 1.32%, and France’s CAC 40 Index added 0.48%. The UK’s FTSE 100 Index eased 0.33%, however.

German economy to shrink for a second year in a row; factory orders plunge

Germany’s Federal Ministry for Economic Affairs and Climate Action forecast that the economy would contract 0.2% this year, a meaningful downward adjustment from its previous estimate for a 0.3% expansion. The ministry also called for stronger consumption to fuel a resumption of economic growth early in 2025. 

Factory orders dropped by 5.8% sequentially in August, a sharper downdraft than the consensus forecast for a decline of 2.0%. Industrial production surprised to the upside, increasing 2.9% as automotive industry output rebounded.

More ECB officials see October rate cut, but minutes still cautious on next move

The ECB reiterated that it expects inflation to slow toward the 2% target by year-end, according to the minutes from the September meeting. The central bank suggested that a gradual reduction of borrowing costs would be appropriate if incoming inflation data points align with its projections. Still, policymakers said they would not pre-commit to a particular rate path. 

Recent comments from ECB officials, however, appeared to align with the market’s view that the pace of policy easing could quicken as inflation slows and the economy weakens. Greek central bank governor Yannis Stournaras told the Financial Times newspaper: "Even if we have one cut of 25 basis points now and another one in December, we will be back to just 3%—still in highly restrictive territory." Banque de France Governor Francois Villeroy de Galhau said in a France Info interview that another reduction was “very likely” in October and that there would probably be more. In addition, the Bundesbank’s Joachim Nagel appeared to soften his hawkishness and said he was open to a move lower in October.

UK economy returns to growth

The British economy rebounded in August, expanding 0.2% sequentially after stagnating in the previous two months. A rise in manufacturing and construction output offset a slight increase in services.

Japan

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.45% and the broader TOPIX Index up 0.45%. Yen weakness provided a favorable backdrop, boosting the profit outlook for Japan’s exporters. The Japanese currency hovered in the high-JPY 148 range against the U.S. dollar, close to its lowest levels since August, having come under pressure earlier in the month as Japan’s new prime minister, Shigeru Ishiba, cautioned that the environment is not ready for an additional interest rate hike. 

In the fixed income markets, 10-year Japanese government bond (JGB) yields followed U.S. Treasury yields higher, as investors tempered expectations around the likelihood of another aggressive (50-basis-point) rate cut by the Federal Reserve in November. The yield on the 10-year JGB rose to 0.94% from 0.87% at the end of the previous week.

Wage decline may keep central bank sidelined

On the economic data front, Japan’s real (inflation-adjusted) wages fell 0.6% year on year in August. The first decline in three months was partly due to the fading impact of higher summer bonuses paid in the prior two months. However, sluggishness in pay trends could lend some support to the view that the Bank of Japan (BoJ) may hold off on raising interest rates again anytime soon, as the positive cycle in which rising wages boost consumer spending has not yet come into view. While household spending fell 1.9% year on year in August, the drop was less than the consensus forecast for a 2.6% decline. 

The latest comments by BoJ policymakers reaffirmed that the central bank’s stance remains unchanged after the change in government. BoJ Deputy Governor Ryozo Himino reiterated that the bank will carefully assess incoming data, the evolving outlook, and the balance of risks and raise its benchmark interest rate if the economy performs in line with its projections. He emphasized that the BoJ is not on a preset course in raising rates.

China

Chinese equities fell over a holiday-shortened week as optimism about Beijing’s stimulus measures waned. The Shanghai Composite Index lost 3.56%, while the blue chip CSI 300 gave up 3.25%. In Hong Kong, the benchmark Hang Seng Index fell 6.53%, according to FactSet. Markets in mainland China were closed Monday for the National Day holiday, which started on Tuesday, October 1.

The National Development and Reform Commission, the country’s economic planning agency, announced at a press conference on Tuesday that China would speed up countercyclical measures to support growth. The speech largely reiterated plans to boost investment and increase direct support to low-income groups and new graduates. Officials also stated that the central government will continue issuing ultra-long special sovereign bonds in 2025 to fund major projects and invest RMB 100 billion in strategic areas. 

The People’s Bank of China launched a RMB 500 billion swap facility to provide liquidity to institutional investors to buy stocks, Bloomberg reported. Under the mechanism, the central bank will accept applications from nonbank financial institutions such as securities firms, funds, and insurers to obtain highly liquid assets, such as government bonds and central bank bills, if they provide certain collateral. The facility was part of a sweeping stimulus package announced by the central bank in late September that included interest rate cuts and other measures aimed at jumpstarting China’s economy.

Spending by Chinese consumers over the long holiday that ended Monday lagged pre-pandemic levels, Bloomberg reported, citing official data. Passenger traffic rose by 5.9%, while spending increased by 6.3% year on year. Box office sales totaled RMB 2.1 billion, down from RMB 2.7 billion reported a year earlier. However, average daily spending per trip was approximately RMB 131, up from RMB 113 during the five-day Labor Day holiday in May.

Other Key Markets

Hungary

Inflation softening, but currency weakness may discourage near-term rate cuts

On Thursday, the Hungarian government reported that inflation in September was measured at a year-over-year rate of 3.0%. This was lower than August’s year-over-year reading of 3.4% and marginally lower than expectations for 3.1%.  

According to T. Rowe Price credit analyst Ivan Morozov, lower fuel prices were the main contributor to the inflation decline. Core inflation, which stayed at a year-over-year rate of 4.8%, was 0.3% in month-over-month terms. This represents some softening after running at a 0.5% month-over-month rate during the summer. 

Overall, Morozov believes that the latest inflation data—by itself—could give policymakers space to continue reducing interest rates. The central bank’s most recent rate cut reduced the base rate from 6.75% to 6.50% in late September. However, recent currency weakness likely means that the second required condition for policymakers to pursue rate cuts—a stable forint in foreign exchange markets—is lacking. As a result, Morozov believes that central bank officials will keep interest rates unchanged at their next policy meeting.

Czech Republic

Inflation uptick unwelcome, but may not be enough to discourage possible rate cut

Elsewhere in Central Eastern Europe, the government of the Czech Republic reported that year-over-year inflation in September was measured at 2.6%. This was higher than expected and higher than the 2.2% reading for August.

According to Morozov, base effects explain part of the increase, while non-core factors seem to be responsible for the rest of the increase. While this uptick in inflation will be unwelcome to central bank officials, he does not believe it will be enough to discourage policymakers from reducing rates at their next policy meeting. As with Hungary, yields on government bonds in the Czech Republic have recently been driven by external factors, and Morozov does not believe that the latest inflation data will change that.