Can you believe its almost November
The first notable economic report from the US since the ongoing government shutdown was the CPI report on Friday, which showed inflation rose at an annualised rate of 3%. However, as is often the case, when expectations are surpassed, markets react positively. Expectations were for a rise to 3.1%, and this news helped push the S&P 500 to a new high by the end of Friday, as bets grew that the Fed would cut interest rates at the two remaining meetings of the year. The first of these meetings is next week, where consensus is for a 25-basis-point cut. Although it does seem a little incongruous, with inflation ahead of the Fed’s target and the US economy apparently in good health, the Fed is adding monetary stimulus into the mix.
Most sectors had a decent week; the tech sector is never far from the best performers, particularly when the markets are positive. Oil stocks did well on the back of the jump in the oil price as Trump looks to put further pressure on Putin. The weakest performing sector was consumer staples again, following a pattern for most of the year.
Last week, we had the monthly flash PMIs, which can influence investor sentiment; on this occasion, the reports generally beat expectations. We have seen in the past that a surprise, particularly to the downside, will have an adverse effect on equity markets. For the US, the composite index of manufacturing and services climbed to 54.8, up from 53.9 the previous month. Indicating strong and accelerating growth in both the manufacturing and services sectors, it is the highest composite reading since July. The eurozone likewise showed an increase month over month, from 51.2 to 52.2. Even the UK had a better month, the Composite index rising to 51.1. Just a quick reminder: any reading above 50 indicates an expanding economy.
The US is not the only country where the odds on rate cuts have increased, as this week’s UK inflation data, whilst remaining well above the Bank of England’s 2%, came in below the 4% anticipated by analysts and feared by investors. This provided a little piece of good news as we get ever closer to Ms Reeves’ 2nd budget.
According to FactSet, just under 1/3 of the S&P 500 have reported earnings, and so far, the blended (year-over-year) earnings growth rate for the S&P 500 is 9.2%. Over 80% of those companies have provided positive surprises on either revenues or earnings.
Looking to the week ahead, aside from the Fed meeting, the ECB also has its monthly meeting, and unlike expectations for the Fed, no change is expected to Euro area interest rates. Ahead of the meeting, there is a whole raft of economic data for the region. There may be a bit of a current vacuum in US economic reports due to the ongoing shutdown; however, towards the end of the week, the monthly employment data is usually released.
Earnings season will continue at a brisk pace, and it’s a big one for the “mag 7” tech names, as it includes Meta, Alphabet, Amazon, and Microsoft. Markets in Europe look to carry on the positive mood from last week.