Weekly Market Recap

Bank of England (BoE) Governor Andrew Bailey said in an interview with The Guardian newspaper that the bank could become “a bit more aggressive” in lowering borrowing costs if the inflation rate continued to fall. However, Chief Economist Huw Pill warned against cutting rates too far and too fast. He said inflation among services firms and pay growth represented "a continued source of concern."

What started as a relatively quiet trading week quickly picked up steam as US markets opened on Tuesday, following reports that Iran was preparing to launch a retaliatory ballistic missile attack against Israel. Later that day (evening in the Middle East), Iran fired nearly 200 missiles directly at Israel. While many of the missiles were intercepted, there were several hits in the southern and central parts of the country and threats of “more devastating attacks” if Israel responded. Stocks pulled back sharply, with the S&P 500 Index down -1.4% at the close of trading. Markets stabilised on Wednesday, however, perhaps because worst-case scenarios failed to materialise.

Tuesday brought another complication for the markets in the form of the start of a walkout by the International Longshoremen’s Association, which effectively closed operations at every major port on the East and Gulf Coasts, together representing the capacity to handle as much as half of all US trade volumes. Fears of a new round of broken supply chains and inflationary pressures dissipated on Thursday evening, however, following news of a temporary agreement that will delay any walkout until mid-January.

Nevertheless, the news seemed to be overshadowed as trading resumed Friday morning by the closely watched monthly nonfarm payrolls report. The Labor Department announced that employers had added 254,000 jobs in September, nearly twice the consensus estimates and the most since March. August’s gain was also revised higher. The household survey also brought better-than-expected news, with the unemployment rate unexpectedly ticking lower to 4.1%.

Although stocks appeared initially to rise on the news, investors seemed unsure how to react to the data, perhaps because of the inflationary implications of an upward surprise in wage figures. Average hourly earnings rose 0.4% in September on the heels of an upwardly revised 0.5% gain in August – the fastest pace since the start of the year.

While generally upbeat, the payrolls report also revealed another monthly decline in manufacturing jobs, the fifth such contraction so far in 2024. On Monday, the Institute for Supply Management (ISM) reported that its purchasing managers’ index (PMI) of factory activity had unexpectedly remained steady in September at 47.2, which is still firmly in contraction territory (levels above 50.0 indicate expansion). In stark contrast, the ISM’s PMI of services sector activity, reported Wednesday, jumped much more than expected to 54.9, its highest level in 19 months. Less favourably, the report also showed price pressures in the sector increasing to their highest level since the start of the year.

PMIs pointing to weaker eurozone growth and inflation falling below the 2% target of the European Central Bank (ECB) combined to strengthen expectations of an interest rate cut in October. Annual headline inflation in the eurozone slowed to 1.8% in September, the lowest level since April 2021 and below forecasts for 1.9%. Core inflation also eased to 2.7% from 2.8% in August. The eurozone composite PMI reading for September was revised higher to 49.6 from 48.9 (PMI readings less than 50 indicate a contraction in activity).

Comments from ECB officials indicated that their gradualist approach to easing monetary policy may be shifting. ECB President Christine Lagarde, for example, hinted that borrowing costs might soon be lowered. "The latest developments strengthen our confidence that inflation will return to target in a timely manner," she told an EU parliamentary hearing. "We will take that into account in our next monetary policy meeting in October." Executive Board member Isabel Schnabel suggested that inflation is increasingly likely to ease back to the 2% target and dropped her usual warning that rates must not be cut too early.

China’s factory activity contracted for the fifth consecutive month amid weak demand. The official manufacturing PMI rose to an above-consensus 49.8 in September from 49.1 in August, according to the country’s statistics office but remained below the 50-mark threshold separating growth from contraction. The manufacturing PMI has now been in contraction for all but three months since April 2023. The nonmanufacturing PMI, which measures construction and services activity, fell to a lower-than-expected 50 in September, its lowest level in 21 months.

Separately, the private Caixin/S&P Global PMI of manufacturing activity eased to 49.3 in September from the prior month’s 50.4, its lowest reading since July 2023 and below economists’ forecasts. The Caixin services PMI fell to 50.3 from 51.6 in August but remained in expansion.

The value of new home sales by the country’s top 100 developers fell -37.7% in September from a year ago, accelerating from August’s -26.8% drop, according to the China Real Estate Information Corp. However, market sentiment improved after three of China’s largest cities relaxed homebuying restrictions on the back of the central government’s extensive stimulus package unveiled the prior week. On Sunday, Guangzhou became the first so-called Tier 1 city to remove all restrictions on home purchases. Shanghai, China’s financial centre, and Shenzhen, the country’s tech hub, also announced reductions in minimum down-payment ratios for first and second homes in an effort to stoke demand.

Shigeru Ishiba won the closely contested leadership election of the Liberal Democratic Party (LDP) on Friday, 27 September – with a surprise win over Sanae Takaichi in a runoff vote making Ishiba Japan’s new prime minister (PM). His monetary policy views are considered slightly hawkish, leading the yen to initially strengthen and sending stock markets lower.

While markets recouped some of the lost ground over the week as Ishiba adopted a more dovish tone than had been anticipated, weighing on the yen, the Nikkei 225 Index and the broader TOPIX Index still registered respective declines over the week. The yen weakened to JPY 148.7 against the US dollar, from 142.2 at the end of the previous week.

Despite a generally dovish tone adopted by Japan’s top government officials, the yield on the 10-year Japanese government bond rose to 0.88%, from the prior week’s 0.85%, tracking US Treasury yields higher as strong US economic data tempered expectations that the Federal Reserve would cut interest rates aggressively.

On the first full day of Ishiba’s new government, the PM commented on monetary policy. While careful not to encroach on the independence of the Bank of Japan (BoJ), he said that the environment is not ready for an additional interest rate hike and stressed his hope that the economy will make progress in a sustainable manner toward the end of deflation with the monetary easing trend in place.

On the economic policy front, Ishiba pledged to maintain continuity with his predecessor, Fumio Kishida, calling for intensive efforts to overcome deflation without the risk of reversing the virtuous cycle. Ishiba also instructed his cabinet to draw up a stimulus package to support households struggling with inflation and to boost regional economies. This comes ahead of a snap election that has been called for 27 October, where the LDP’s dominance and general backing are likely to remain strong.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -0.6% (2.4% in September, 18.5% YTD).

In the US, the S&P 500 Index posted a gain of 0.3% (2.1% in September, 21.9% YTD). A late rally helped large-cap stocks notch their fourth consecutive weekly gain despite growing tensions in the Middle East and news of a dockworkers’ strike at Eastern seaports. While weighing on sentiment generally, the prospect of a wider war in the Middle East sent oil prices to their highest level in about a month, benefiting energy shares. Conversely, the Middle East worries appeared to weigh on cruise line stocks and the consumer discretionary sector. Nike also fell sharply on Wednesday, after the company withdrew its full-year sales guidance.

Growth stocks outpaced value shares and small caps lagged large caps. The Russell 1000 Growth Index returned 0.3% (2.8% in September, 24.3% YTD), the Russell 1000 Value Index 0.2% (1.4% in September, 16.6% YTD) and the Russell 2000 Index -0.5% (0.7% in September, 10.3% YTD). The technology-heavy Nasdaq Composite added 0.1% (2.8% in September, 21.5% YTD).

In Europe, the MSCI Europe ex UK Index ended the week -2.1% lower (-0.4% in September, 9.7% YTD) as an escalation of conflicts in the Middle East made investors cautious. Major stock indexes also fell sharply. Germany’s DAX Index declined -1.6% (2.2% in September, 14.1% YTD), France’s CAC 40 Index fell -3.2% (0.2% in September, 2.9% YTD) and Italy’s FTSE MIB Index dropped -3.3% (-0.6% in September, 15.4% YTD). Switzerland’s SMI Index gave up -1.9% (-2.0% in September, 11.2% YTD). The euro weakened versus the US dollar, ending the week at USD 1.10 for EUR, down from 1.12.

The FTSE 100 Index eased -0.5% (-1.5% in September, 10.4% YTD) and the FTSE 250 Index lost -1.5% (0.1% in September, 9.0% YTD). The British pound depreciated versus the US dollar, ending the week at USD 1.31 for GBP, down from 1.34.Japan’s stock markets suffered sharp losses around the start of the week as investors digested the country’s latest political developments. The TOPIX Index fell -1.7% (-1.6% in September, 16.2% YTD) and the TOPIX Small Index lost -0.9% (-0.4% in September, 11.7% YTD).

In Australia, the S&P ASX 200 Index ended the week -0.7% lower (3.2% in September, 11.8% YTD).

MSCI Emerging Markets Index was 0.4% higher (6.7% in September, 18.0% YTD), with a positive contribution to performance from the stock market of China and a negative contribution from those of India, Taiwan, South Korea and Brazil. 

Chinese stocks surged in a holiday-shortened week as optimism about Beijing’s comprehensive support measures offset disappointing data. The Shanghai Composite Index rallied 8.1% (17.6% in September, 15.3% YTD) and the blue-chip CSI 300 Index soared 8.5% (21.1% in September, 20.3% YTD). In Hong Kong, the benchmark Hang Seng Index jumped 10.2% (18.3% in September, 39.0% YTD). Markets in mainland China were closed on Tuesday for the National Day holiday and reopened on Monday, 7 October. Hong Kong markets were closed Tuesday but reopened Wednesday.

In Poland, the government reported that the inflation rate in September was 4.9%. This was in line with expectations, though it was higher than August’s 4.3% reading.

According to T. Rowe Price credit analyst Ivan Morozov, the higher inflation reading primarily reflects base effects from 2023. Still, he notes that core inflation remains above the central bank’s target and that core inflation momentum keeps running at about 4%. He also believes that base effects are likely to keep inflation elevated at close to 5% until summer 2025. From the central bank’s point of view, Morozov believes that this latest inflation reading will prompt policymakers to keep short-term interest rates steady until at least the early part of 2025.

In Türkiye, the government reported last week that the inflation rate in September was 2.9% month over month. As a result, the annualised consumer price index (CPI) reading fell to 49.5% in September from 52% in August. This means that headline inflation is not only below 50% for the first time since July 2023 but also below the central bank’s benchmark interest rate, the one-week repo auction rate, currently at 50.0%.

T. Rowe Price analysts expect Turkish inflation to continue dropping through the end of the year, but it will likely remain above the central bank’s current target of 38%. They also believe that monetary policy will remain tight through year-end, though it is possible that the central bank could begin a rate-cutting cycle with a modest reduction in November or December. Policymakers, however, might decide to keep various macro-prudential regulations in place in order to restrain credit growth.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.7% (1.2% in September, 3.8% YTD), the Bloomberg Global High Yield Index (hedged to USD) was flat (1.8% in September, 9.5% YTD) and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned -0.6% (1.8% in September, 7.4% YTD).

The jobs report led to a spike in longer-term bond yields, with the yield on the benchmark 10-year US Treasury note spiking to its highest intraday level (3.98%) since 8 August. Over the week, the 10-year Treasury yield increased 22 basis points (bp) to 3.97% from 3.75% (down -12bp in September and up 9bp YTD). The 2-year Treasury yield rose 36bp, ending the week at 3.92% from 3.56% (down -28bp in September and -33bp YTD).

Meanwhile, issuance was oversubscribed in the US investment-grade (IG) corporate bond market during the week, as demand for IG credit remained robust. After starting the week at or near year-to-date tight levels, credit spreads remained unchanged to slightly tighter throughout the week. Broader risk-off sentiment due to escalating geopolitical tensions in the Middle East weighed on the high yield bond market. Primary market issuance was subdued after a few deals were announced early in the week.

Over the week, the 10-year German bund yield increased 8bp, ending at 2.21% from 2.13% (down -18bp in September and up 19bp YTD).

The 10-year UK gilt yield increased 15bp, ending the week at 4.13% from 3.99% (down -1bp in September and up 60bp YTD).