USA
The U.S. stock market closed on a positive note last week, the S&P 500 rose by 0.22%, the NASDAQ gained 0.10%, and the Dow Jones Industrial Average advanced by 0.09%. On Friday, the U.S. Department of Labor released a detailed employment report for September, which turned out to be entirely inflationary! The number of jobs created significantly exceeded the forecast—254,000 compared to the expected 147,000. Moreover, the August figure was revised upward. As a result, the unemployment rate dropped from 4.2% to 4.1%. At the same time, hourly wage growth in September amounted to 0.4%, while analysts had expected a more modest increase of 0.3%. Wage growth in August was also revised upward, from 0.4% to 0.5%. Interestingly, U.S. stocks showed a noticeable increase following the release of this data. However, this is hardly surprising given that strong economic data is paired with a dovish Federal Reserve. It's worth noting that after the release of the report, traders merely reduced the likelihood of a 50-basis point rate cut at the next FOMC meeting in favor of the more standard 25-basis point move. Meanwhile, other segments of the stock market were less fortunate. The U.S. dollar index rose, and the bond market reflected higher interest rates. For example, the yield on 10-year U.S. Treasuries approached 4%. Additionally, the market remains under pressure from the potential response of Israel to last week's missile attack by Iran. Many are reminded that today marks exactly one year since Israel was attacked by Hamas and drawn into the Middle East conflict, with no clear end in sight.
Europe
Major indices across Europe posted negative results last week. The Stoxx 600 decreased by 1.80%, with broad-based gains across various sectors. However, the FTSE 100 in the UK dropped by 0.48%, while Germany’s DAX 40 fell by 1.81%, France’s CAC 40 declined by 3.21%, and Spain’s IBEX 35 reduced by 2.58%. Throughout the week, market sentiment was dominated by speculation over the ECB’s next move. Analysts pointed to a substantial slowdown in inflation and economic activity as key factors justifying another rate cut. ECB President Christine Lagarde’s comments to the European Parliament provided further momentum to these expectations, as she indicated the central bank’s increasing confidence that inflation would return to its 2% target. This statement, coupled with September's inflation estimate of 1.8% (down from 2.2% in August), has prompted many investors to anticipate not only a rate cut in October but also a more aggressive pace of cuts in the coming months.
Money markets have now priced in a 25-basis-point rate cut for October, with a total of 51 basis points of cuts expected by the end of 2024. Some forecasts, such as from SEB and Morgan Stanley, predict continuous rate cuts at each ECB meeting, potentially bringing the deposit rate down to 2.00% by mid-2025, from its current level of 3.50%. This shift marks a departure from the ECB’s previous stance of data dependency, signaling a more preemptive approach to monetary easing.
The eurozone’s economic backdrop continues to be characterized by slowing inflation and weakening growth. September’s inflation estimate of 1.8% fell below the ECB’s target of 2%, reinforcing the case for further easing. The slowdown in inflation has been more pronounced than expected, with some analysts noting that the era of gradualism in ECB policy may be coming to an end. As a result, the central bank is likely to adopt a more proactive approach to rate cuts in an effort to support economic activity and avoid slipping back into deflationary pressures.
Japan
The Nikkei 225 dropped by 3.00%, while the Topix index declined by 1.71%. The Tokyo stock market faced downward pressure throughout the week, particularly following the election of Shigeru Ishiba as the new prime minister. Concerns over Ishiba’s initial hawkish stance on fiscal and monetary policy led to investor uncertainty. Despite later signaling a softer tone and a commitment to continued economic stimulus, Tokyo shares remained volatile. The Nikkei 225 saw declines, dragged down by apprehensions over tighter fiscal policies and the future trajectory of interest rates. Additionally, the market's reaction was dampened by the lack of immediate details on the economic stimulus package announced by Ishiba, though the government hinted at cost-of-living relief for households. Analysts are awaiting further clarity on the scope and scale of these measures to gauge the market's outlook. Overall, the Nikkei 225 closed the week with a modest decline, reflecting caution among investors.
China
The Hong Kong Hang Seng Index surged by an impressive 10.20% over the week, continuing its upward trajectory as Chinese equity markets benefitted from supportive economic policies from the People’s Bank of China (PBOC). The catalyst for this surge in Chinese equities began on September 24, when the PBOC unleashed a significant stimulus package, cutting interest rates by 50 basis points. This move was aimed at countering the economic downturn triggered by China's struggling property sector, weighed down by high debt levels. The combination of the rate cut and the broader economic support measures has led to one of the most rapid rallies in China's market history, with Chinese stock indices posting strong gains across the board. Both the Shanghai and Shenzhen stock exchanges were closed for China’s Golden Week holiday, which began on October 1, and are set to reopen on Tuesday, October 8. In the meantime, the Hong Kong stock exchange remained active, with the Hang Seng Index continuing its surge during the week. Investors remain optimistic that when the mainland exchanges reopen, they will follow the same upward trajectory seen in Hong Kong. While China’s markets are showing impressive gains, the outlook remains dependent on the continuation of supportive policies and the stabilization of key sectors, particularly the property market. Investors will be closely watching corporate earnings reports and any further government measures to gauge the potential longevity of the current rally.