A relief rally? Quite possibly

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That was the week investors in stocks and bonds became convinced the Fed and other developed central banks had finished raising interest rates and are now persuading themselves that the US economy “soft landing”  scenario is on the cards. The Fed, the ECB and the Bank of England chairs all sang from the same song sheet, as they reiterated that this pause remains just a pause and reserves the right to raise rates again.  

There are further signs that tighter monetary policies and higher wages are biting into the employment market. The latest US jobs report on Friday reported that 150,000 jobs had been created in October was well below last month’s 297,000 and this month’s estimate of 170,000, but just enough to suggest the economy remains resilient. As well as a fewer number of jobs being created the number of openings in the US rose above expectations. The two-year treasury yield, until recently trading close to 5.25%, finished the week at 4.8%. Equities were probably due a bounce after 3 solid months of declines, and sentiment was depressed.

According to S&P Market Intelligence, the monthly global PMI manufacturing reports indicate global manufacturing remained in the “doldrums” in October as the headline PMI registered 48.9 down from 49.2 in September. A further indication of a continuation of deterioration in business conditions that has been going on for all this year. New orders are also falling, not improving the outlook.

Where to from here is a debate? Bonds rallied last week in response to what was described by commentators as a “hawkish hold”, but the market took it another way. The macro data definitely continues to suggest a slowing US economy. Retail sales remain resilient in the US however Consumer sentiment is weakening. The next economic upturn starts with rising bond prices as markets start to anticipate the next stimulus cycle, as growth slows. Equities can rise initially as lower bond yields improve their appeal, probably what happened last week. Time moves on as equities and bonds react to slowing growth, but the correlation between the two ends as bond prices continue to rise and equity prices fall on fears that slower growth will hurt earnings, and at some point, the central bank steps in and the cycle starts again.

This week we will have more earnings to focus on, the Q3 season has generally beaten expectations on the numbers but outlook statements remain cautious. On the macro front, we get the monthly Chinese export-import data, often considered a window into global economic activity. We saw last week the global shipping giant Maersk warn of lower demand for shipping. It is a busier week for UK data as we get housing data, and Q3 GDP estimates, which are expected to report a slowdown in economic activity. We also get industrial and manufacturing production reports for September. Stocks are starting the week on a cautious note.