Markets Weekly podcast
The influence (or not) of politics
28 October 2024
Julien Lafargue flies solo on this week’s podcast and breakdowns the key market events and trends of recent days. Tune in as he ponders the impact of ongoing global geopolitical uncertainty on investor decision-making. He also reflects on weakening UK investor sentiment ahead of this week’s Autumn Budget being unveiled.
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Julien Lafargue (JL): Welcome to a new edition of Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank, and I will be your host today.
I’m running solo today, so we’re just going to run through the events of last week, and then look at what is going to be a very busy week ahead. But let’s start with last week.
So, last week was a relatively mixed week for global assets. The S&P 500 finished the week lower, breaking a six-week winning streak, as yields jumped. The US government two-year yield is actually back above 4%, and the US 10-year yield is back to July levels, before the Fed cut interest rates by 50 basis points in August.
At the same time, gold is reaching all-time highs every other day or so, and really the reason behind that is the fact that the so-called “Trump trade” is back in force. The consensus expects inflation to be elevated for a few years, in the case of a Trump presidency, simply because most of the policies that he has been discussing on the campaign trail are, I would say, deficit unfriendly. That is, there are a lot of additional expenses that are being promised, like lower corporate taxes, in particular. That’s probably the biggest one, alongside with an extension of existing tax cuts.
And, in front of that, the only additional source for further revenue, is in the form of import tariffs being applied across the board. So, the market is really playing the view that if Donald Trump were to be elected, we would see a much higher deficit and, therefore, the risk of further inflation.
This has really become the consensus at this point, not so much around the Trump victory, I think he is a favourite right now, but it’s not a done deal, far from it. But, clearly, because on the other side, Kamala Harris is not really talking about reining in the deficit either.
What you’re seeing, is the market playing this idea of inflation remaining elevated for a while, to the point that you cannot really find anybody who has the opposite view, thinking that inflation might actually not go higher in the coming months or quarters. And, to some degree, when you have a consensus that is so one-sided, it’s almost tempting to take the other side of that view.
Beyond the discussion around US deficits, we’ve got a few other macroeconomic data points, mostly in the form of the PMIs in the eurozone and in the UK.
So, starting with the eurozone. Nothing really new there. Business activity remained weak in October. The composite PMI was at 49.7, so signalling ongoing contraction. France and Germany, the bloc’s two largest economies, drove much of the decline, and you’re continuing to see slightly better momentum in the so-called periphery.
Now, home in the UK, things weren’t much better. The UK composite PMI hit an 11-month low in October, at 51.7, so at least it’s still in expansionary territory. But not only that, according to the market research company GFK, UK consumer confidence hit its lowest level this year, in October. And this is really despite inflation falling to a three-year low. So, what could explain that?
Well, beyond the weather, I think it’s been one of the wettest Septembers on record in some counties, it looks like the (UK) decline reflects the growing public apprehension about the upcoming Budget, and the Chancellor’s warning of tough choices ahead. So, we’re going to know more about those tough choices later this week, but clearly there is a lot of apprehension ahead of the upcoming Budget.
Now, the macroeconomic news flow was fairly light. Most of the action took place at the micro level, with 30% of the S&P 500 reporting earnings last week. So, we’re now more than a third of the way through the earnings season. Currently, around 75% of US companies that have reported, have beaten expectations but by a relatively small margin. According to FactSet, companies are reporting earnings of around 6% above estimate, which is quite some way below the five-year average of 8.5%.
So, if we continue on that trend, and if 3.6%, which is what is currently pencilled in, is the actual growth rate, in terms of earnings for the quarter, it will mark the fifth consecutive quarter of year-over-year earnings growth, which is great. But, we also marked the lowest earnings growth rate reported by the S&P 500 companies since the second quarter of 2023.
So, despite a high proportion of beats, 75, this is not really shaping up to be an amazing US earnings season. Now, all that could change this week. We get five of the so-called ‘Magnificent Seven’ reporting earnings. Of course, these are big companies and, therefore, they may have a big influence on those numbers, so we will see. But, so far, I would say a relatively mixed earnings season in the US.
Now, the market will probably be focused on that this week, but the macro is likely to stage a comeback, because we’re going to get a lot of US data, and mostly focused on labour data.
But, in terms of the overall picture, we’re going to get, first, the US JOLTS report for September. That will come on Tuesday. We’re going to get some inflation data from Europe, in particular Spain and Germany, for the month of October, that’s Wednesday, followed by US GDP for the third quarter.
Of course, we’ll also have the UK Budget on Wednesday, some Chinese PMI on Thursday, as well as the Bank of Japan decision. Then, we’re going to get European CPI, so inflation data for October on Thursday, the PCE for September on Thursday. And we’re going to end up the week with a firework, and the US jobs report and nonfarm payroll.
And this is obviously the big one for the week. All of those datapoints will be relevant, but, clearly, the market is going to be focused on the nonfarm payroll. And the consensus is looking for only 110,000 of job creation in October, so that is a fairly low number, compared to the surprisingly strong 254,000 net job creation that was reported in September. That said, the unemployment rate is expected to have remained stable at 4.1%.
I think this is going to be a very noisy, and somewhat messy, US jobs report and the reason for that is that we have to deal with the impact of the hurricanes in the US, as well as the ongoing Boeing strike. And, according to some estimates, these could subtract as much as 60,000 jobs. So, the implications of this release for the Fed and the FOMC, could, in fact, be rather limited, and what we’re likely to see is that, if we do get a relatively low number, so 110,000 or less, the market is likely to discount that miss and attribute it to those two factors, the hurricanes and the Boeing strike.
So, it looks like we’re going into this release with a bit of an asymmetric setup here, where the consensus for the market is likely to discount the weaker-than-expected number. And what you would really need to see to create a significant surprise is a strong beat, so another 200,000 plus type of report. And if we do get that, then the market is going to go even further into this inflation fear, or pricing in higher inflation going forward, which could result in higher yields still. So, it looks like we’re a bit at a disadvantage, so to speak, going into this report, and the only surprise would really come in the form of a much stronger-than-anticipated nonfarm payroll.
That’s it for this week. It’s a lot though, so we’re definitely going to be back next week to try and analyse all that, whether it’s the earnings or the macroeconomic data that we’re going to receive.
We’re also going to be back and debrief the UK Budget, once we know exactly what it is made of. But, in the meantime, as always, we wish you the very best in the trading week ahead.
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