Week ending 6th October 2023.

In recent times, the surge in bond yields has been a dominant factor shaping markets on the expectation that major central banks may hold rates for longer. Signs of robust economic data has raised concerns as of late about the Federal Reserve’s future policy decisions.

We saw a remarkable turn of events on Friday in the US, following the latest non-farm payrolls report. Initially, there was a sharp market reaction to the September 2023 report, which revealed unexpectedly strong job gains. Employers added an impressive 336,000 jobs during the month, the most significant increase since January 2023, and nearly double analysts’ predictions. Upon further inspection the rise may have been distorted somewhat by seasonal adjustments.

This news initially led to concerns about the Federal Reserve’s potential actions in response to the robust labour market, causing stocks to dip. However, sentiment quickly shifted from caution to enthusiasm as the broader context of the report was considered. Of particular note was the indication of softening wage growth, suggesting that the Fed’s efforts to contain inflation may be yielding results. Average hourly earnings inched up by just 0.2% in September, a slower pace than the 0.3% increase anticipated by analysts. The unemployment rate remained stable at 3.8%.

In the week ahead, investors will be looking to the latest US CPI report following this week’s robust jobs report. Markets are hoping for further signs of easing inflation, which may enable the Fed to conclude its interest rate hike cycle, which we believe will exert a more substantial influence on the markets.

Moving on to European markets, which also experienced a challenging week again due to growing concerns about surging bond yields. Whilst Christine Lagarde, President of the European Central Bank (ECB) said on Wednesday that future policy decisions “will ensure that the interest rates will be set at sufficiently restrictive levels for as long as necessary,” recent indicators demonstrated a slowdown in Q3. The Composite Purchasing Managers’ Index (PMI) contracted for the fourth consecutive month, signalling economic challenges. Retail sales in the eurozone also disappointed, declining more than anticipated in August 2023.

In China, financial markets were closed for holidays. Encouragingly, factory activity in China expanded for the first time since March 2023 suggesting a potential economic turnaround. Domestic activity during the holidays exhibited a significant uptick. Additionally, the property sector in China showed some improvement in September following stimulus measures introduced in August.

Lastly, in the realm of commodities, oil prices experienced their steepest weekly losses since March 2023, driven by concerns about higher interest rates potentially slowing global growth and reducing fuel demand. However, escalating conflict risks in the Middle East could also impact oil prices in the week ahead.

Additionally, the market will closely watch for inflation data, with updates on producer and consumer prices in the US. The Federal Reserve’s meeting minutes from its latest Federal Open Market Committee (FOMC) meeting will provide insights into the central bank’s policy discussions. Also due this week we have UK GDP for August 2023, Chinese inflation and balance of trade data. Earnings season kicks off with reports from major financial institutions, including JPMorgan Chase, Wells Fargo, Citigroup, and PNC Financial Services. Earnings reports from companies like PepsiCo, Delta Air Lines, Walgreens Boots Alliance, and UnitedHealth will also be closely monitored.

The Investment Management Team