Shaw and Partners

Wall Street ended the week mixed, with the S&P 500 and Dow Jones Industrial Average both snapping six-week winning streaks, while the Nasdaq Composite ended slightly higher. The tech-heavy index hit a new intra-day high on Friday and managed to eke out a 0.2% weekly gain. Investors are gearing up for earnings reports this week from several tech heavyweights. Amongst the Magnificent Seven group which have been a strong driver of gains this year, Tesla outperformed after the electric vehicle maker delivered better-than-expected earnings as well as forecasting up to 30% sales growth in 2025.

For the week, the S&P 500 and Dow Jones ended 1% and 2.7% lower, respectively, with most sectors seeing losses. Equities were generally under pressure from a rapid rise in Treasury yields. The jump in yields came as investors reassessed their expectations around rate cutting from the Federal Reserve. The week was relatively light for economic data, however, recent releases have generally been better-than-expected and more supportive of a steadier rate cutting cycle. Markets are currently pricing in a 25 basis point cut at the November meeting. The yield on the 10-year Treasury note ended higher at 4.24%, after settling earlier in the week at its highest level since July.

European markets were also lower on the prospect of a slower pace of monetary easing from the Fed. The pan-European STOXX 600 lost 1.2%, following on from two weeks of gains, with regional indices also retreating for the week. Investors parsed through the latest batch of earnings reports, however, they proved mixed and data from LSEG indicated a lower-than-average percentage of earnings beats so far. The latest economic data gave little cheer, with a preliminary estimate of the eurozone composite Purchasing Managers’ Index (PMI) rising to 49.7 in October from 49.6, but remaining in contractionary territory. Weakness was driven by France and Germany. Indeed, in the International Monetary Fund’s latest World Economic Outlook, it lowered its growth forecast for the eurozone to 0.8% and 1.2% for this year and 2025 respectively, primarily fuelled by downward revisions in Germany.

In Japan, the Nikkei 225 fell by 2.7% for the week as investors were cautious ahead of the weekend’s general election. Some polls were indicating that the ruling Liberal Democratic Party could lose its outright majority, and the uncertainty pushed the yen lower against the US dollar. The Hang Seng lost 1% over the week; however, on the mainland, the Shanghai Composite was one of the few gainers, rising 1.2%. There was some optimism as further stimulus measures were implemented in China. This included the People’s Bank of China (PBoC) injecting 700 billion yuan via its medium-term lending facility, while Chinese banks cut their one and five-year loan prime rates by 25 basis points in line with PBoC’s move last month

Weekly macro highlights

UK CPI inflation eases in September

UK consumer price index (CPI) inflation rose 1.7% year-on-year (YoY) in September, below the 2.2% registered in August and market expectations for a 1.9% increase. The decline in headline inflation to its lowest level since April 2021 was driven by transport prices, which fell 2.2% YoY. In addition, 1.7% and 1.0% YoY declines in housing and household services, and furniture and household goods prices helped lower inflation in September. The core CPI inflation measure, which excludes food, energy, alcohol and tobacco, rose 3.2% YoY in September, down from the 3.6% YoY increase recorded in August. Services inflation, which the Bank of England has been paying close attention to as a signal of underlying domestic inflationary pressures in the UK economy, rose 4.9% YoY in September, declining from the 5.6% YoY rise in August. Goods prices extended their 6-month deflation streak, falling 1.4% YoY in September, below the 0.9% YoY decline in August.

ECB cuts rates in October

The European Central Bank (ECB) Governing Council voted to reduce the deposit facility rate by 25 basis points to 3.25% at its meeting on 17 October. The move was in line with market expectations and represented the second consecutive rate cut at a Governing Council meeting following the one on 12 September. The ECB noted the decision was based on its updated assessment of the inflation outlook, which has been affected by recent downside surprises to indicators of economic activity. The central bank expects inflation to rise in the coming months before declining to its 2% target over the course of 2024. In her post-meeting press conference, President of the ECB Christine Lagarde highlighted a continued contraction of the manufacturing sector in the eurozone and a recent loss of momentum in the services sector. In addition, employment growth and demand for labour have been slowing. Risks to growth are tilted to the downside.

China’s GDP expands in Q3

China’s gross domestic product (GDP) rose 4.6% year-on-year (YoY) in Q3 according to data published by the National Bureau of Statistics (NBS). The increase in GDP was above market expectations for a 4.5% YoY expansion but below the 4.7% recorded in Q2. Combined with the 5.3% YoY GDP growth in Q1, the Chinese economy has expanded 4.8% YoY year-to-date. Contributing to this were 3.4%, 5.4% and 4.7% YoY increases in the value added of the primary, secondary, and tertiary industries respectively. In addition to the quarterly data, the NBS released monthly data last week, showing a pickup in activity in September. Retail sales rose 3.2% YoY, above market expectations for a rebound from August’s 0.7% increase to 2.5%. Industrial output rose 5.4% YoY, with markets having anticipated it would remain unchanged at August’s 4.5% YoY. The unemployment rate declined from 5.3% to 5.1%, remaining in the 5.0-5.3% range it has occupied since March 2023.