Despite the stalemate in the US election, the market's bet on Trump's victory is driving the "Trump trade" back. Coupled with the strong US economic data suppressing the Fed's interest rate cut prospects, US Treasury yields rebounded sharply this week, with the benchmark 10-year US Treasury yield breaking through 4.25% at one point, hitting a three-month high. The US dollar rose for the fourth consecutive week, the longest streak in eight months. A number of non-US currencies were eclipsed, and the yen fell below the 153 mark before the Japanese House of Representatives election at the weekend.
In terms of commodities, gold fell from its historical high and fell into volatility, with the weekly increase narrowed to nearly 1%, and silver was close to flat. Geopolitical uncertainty limited the callback space of precious metals. Crude oil, which also benefited from the tension in the Middle East, rose this week, with US oil rising 4% for the whole week and Brent oil rising 3.65% for the whole week.
The three major U.S. stock indexes showed divergent trends, with the S&P 500 falling 0.96% this week and the Dow Jones Industrial Average falling 2.68%, both ending their six-week winning streak. The Nasdaq rose more than 1% during Friday's session, setting a new record high, and rose 0.16% for the week, marking its seventh consecutive week of gains.
The following are the key points that the market will focus on in the new week (all in Beijing time):
Central Bank News: Expectations for a Fed rate cut changed drastically before the "quiet period", increasing the risk of a short-term correction in gold
Federal Reserve: Federal Reserve officials enter the "quiet period" before the meeting
The Fed’s unexpected decision in September to kick off an easing cycle with a 50 basis point rate cut now seems like a distant memory and is even being questioned as a “policy mistake”. Since the September meeting, US economic indicators have been on the strong side, including the CPI report. The market narrative is shifting towards a “no landing”, which has stimulated a sharp reversal in US bond yields, which in turn has pushed up the dollar.
Several Fed officials have publicly supported gradual rate cuts. According to the Chicago Mercantile Exchange's FedWatch tool, the market is pricing in a 95.6% chance of a 25 basis point rate cut at the Fed's November meeting. In contrast, a month ago, the market fully priced in a rate cut of at least 25 basis points in November, and a 57.4% chance of a 50 basis point cut. The Fed's next rate decision will be held after the U.S. election, and the market will digest a lot of economic data before then.
In the face of some complex risk events, gold has risen along with the dollar, U.S. Treasury yields and stocks, which seems counterintuitive. Marc Chandler, managing director of Bannockburn Global Forex, expects gold prices to consolidate in the short term and says the risk is now biased to the downside. He said, "My guess is that gold will return to $2,600 before rushing to $2,800. Alex Kuptsikevich, senior market analyst at FxPro, also believes that there is a possibility of a correction in gold prices in the near term. He pointed out that "gold continued to hit record highs in the first half of this week, but fell back by $50 on the same day, and prices are still at a peak as caution intensified over the weekend. We would not be surprised if it pulls back to the $2,670-2,700 range in the coming week."
Still, analysts expect a brief pullback in gold to not break its strong bullish trend. Inflation and geopolitical risks in the U.S. and abroad are driving gold prices higher, and neither of those risks will stabilize anytime soon. Bob Haberkorn, senior commodities broker at RJO Futures, said he remains very bullish on gold. He said gold has quickly attracted buyers every time it falls, and more money will flee to safe havens as the election approaches. Haberkorn believes that as the market now prices a Trump victory in the upcoming election, this should also spark inflation concerns in the short term, supporting gold.
Other central banks:
At 1:00 on Tuesday, Bank of Canada Governor Macklem will participate in a fireside chat at a conference
The Bank of Japan will announce its interest rate decision and outlook report on Thursday
At 14:30 on Thursday, Bank of Japan Governor Kazuo Ueda held a monetary policy press conference
The Bank of Japan has taken a more patient stance after raising its short-term policy rate target to 0.25% in July. It is widely expected to keep short-term rates unchanged next week while gradually reducing its bond purchases.
Nonetheless, the Bank of Japan will update its forecasts for inflation and growth prospects at this meeting, which may provide investors with clues on the possibility of a rate hike in December or the first few months of 2025. In the absence of any hints about rate hikes in the near term, the yen may continue to struggle against the dollar. However, another weakening of the yen would only incentivize policymakers to raise rates sooner rather than later, a risk that investors may be ignoring.
Recent comments from Bank of Japan Governor Kazuo Ueda do not seem to indicate any strong policy commitments in the future. He said it would "still take time" to sustainably achieve its 2% inflation target. Data released on Friday showed that Tokyo's core consumer price index fell below 2% for the first time in five months in October, mainly due to a slowdown in energy price increases as the Japanese government subsidizes energy prices. Tokyo's CPI data is often seen as a leading indicator of Japan's inflation trend.
Uncertainty over the upcoming US election should also prevent policymakers from making any strong guidance. In addition, the possibility that the ruling Liberal Democratic Party (LDP) will lose its majority in Sunday's parliamentary elections will also complicate the Bank of Japan's policy normalization process. The LDP may need to form a coalition with smaller parties, making it more difficult for Japanese Prime Minister Shigeru Ishiba to push for fiscal consolidation and monetary policy normalization, and his leadership may also be uncertain.
Important data: Heavy data are coming out one after another, are dollar bulls about to explode again?
Monday 19:00, UK October CBI retail sales balance
At 22:30 on Monday, the U.S. Dallas Fed Business Activity Index for October
At 21:00 on Tuesday, the monthly rate of the FHFA House Price Index in August and the annual rate of the S&P/CS 20-city House Price Index in August in the United States
Tuesday 22:00, US September JOLTs job vacancies, US October Conference Board Consumer Confidence Index
At 8:30 on Wednesday, Australia's third quarter CPI annual rate and Australia's September weighted CPI annual rate
At 18:00 on Wednesday, the preliminary annual GDP rate of the euro area in the third quarter, the industrial sentiment index of the euro area in October, the final value of the consumer confidence index of the euro area in October, and the economic sentiment index of the euro area in October
Wednesday 20:15, US October ADP employment data
At 20:30 on Wednesday, the preliminary value of the annualized quarterly rate of real GDP in the third quarter of the United States, the preliminary value of the quarterly rate of real personal consumption expenditure in the third quarter of the United States, and the preliminary value of the annualized quarterly rate of the core PCE price index in the third quarter of the United States
At 20:30 on Wednesday, British Chancellor of the Exchequer Reeves will present the budget report
At 22:00 on Wednesday, the monthly rate of the U.S. existing home sales index in September
At 22:30 on Wednesday, the U.S. EIA crude oil inventory and strategic petroleum reserve inventory for the week ending October 25
Thursday 9:30, China's October official manufacturing PMI
At 18:00 on Thursday, the euro area's October CPI annual rate preliminary value, the euro area's October CPI monthly rate, and the euro area's September unemployment rate
Thursday 19:30, US Challenger Enterprise Layoffs in October
At 20:30 on Thursday, Canada's August GDP monthly rate
At 20:30 on Thursday, the number of initial jobless claims in the United States for the week ending October 26, the annual rate of the U.S. core PCE price index in September, the monthly rate of the U.S. core PCE price index in September, the monthly rate of personal spending in September, and the quarterly rate of the U.S. labor cost index in the third quarter
Friday 9:45, China's October Caixin Manufacturing PMI
At 17:30 on Friday, the final value of the UK manufacturing PMI for October
At 20:30 on Friday, the seasonally adjusted non-farm payrolls in the United States in October, the unemployment rate in the United States in October, and the monthly rate of average hourly wages in the United States in October
At 21:45 on Friday, the final value of the US October S&P Global Manufacturing PMI
Friday 22:00, US October ISM Manufacturing PMI
With the Federal Reserve's November interest rate decision approaching, next week's data will provide the latest snapshot of the U.S. economic strength and inflation situation.
The October Consumer Confidence Index and September JOLTS job openings released on Tuesday will kick off a series of more important data that will be released starting on Wednesday. The first is the first estimate of GDP for the third quarter. The annualized growth rate of the US economy in the third quarter is expected to be 3.0%, the same as in the second quarter. This is not only above average, but the probability of an upward surprise in the data is greater than the possibility of a downward surprise. The GDPNow model of the Atlanta Fed predicts that the US GDP growth rate in the third quarter will be 3.3%.
Thursday's PCE report is expected to show a difference between headline and core inflation, just like the CPI report. Headline PCE, the Fed's favorite inflation indicator, is expected to grow 2.1% year-over-year and month-over-month in September, respectively, while core PCE is expected to read 2.6%, both slightly down from the previous month. In terms of month-over-month growth, headline PCE is expected to rebound to 0.2% from 0.1% last month, while core PCE is expected to rebound to 0.3% from 0.1% last month. Mixed inflation data may provide limited guidance on the Fed's interest rate path.
The U.S. non-farm payrolls report for October will be the finale on Friday. Analysts estimate that the U.S. economy created 125,000 jobs in October, indicating a significant slowdown in employment growth; while the unemployment rate is expected to remain unchanged at 4.1%; average hourly earnings growth is expected to slow from 0.4% month-on-month to 0.3%, while the year-on-year growth rate remained at 4%. Still, markets are likely to attribute some of the weak jobs data to distortions from hurricanes Helene and Milton and U.S. port strikes, which may be viewed as temporary. Also important is the ISM Manufacturing PMI, whose October reading is expected to improve to 47.6 from 47.2 the previous month.
With the Fed now more worried about the job market than inflation, weak employment data could shift the market back to a more dovish tone. In addition, any signs that the U.S. economy is cooling could push up market bets on a series of rate cuts from the Fed in the coming meetings. However, if growth remains strong and the PCE data suggests some stickiness in inflation, rate cut bets could be further dampened. Currently, only one additional 25 basis point rate cut from the Fed this year is fully priced in. If expectations of a November rate cut begin to be questioned, the dollar could climb to new highs and stocks could face selling pressure.
The dollar's renewed strength has weighed on non-US currencies. As expected by technical analysts, the double-top formation of the euro against the dollar has recently caused it to hit a 16-week low below 1.08. Next week's data releases are unlikely to help euro bulls much. The preliminary estimate of eurozone GDP released on Wednesday may show that the region's economy grew by only 0.2% month-on-month in the third quarter, and the year-on-year growth rate is expected to rebound slightly from 0.6% to 0.8%. On Thursday, attention will turn to the eurozone's preliminary CPI reading, with the overall CPI growth rate in October likely to rise slightly to 1.9% year-on-year from 1.7% last month, but the ECB has already predicted that inflation will pick up in the coming months. Stronger-than-expected data may provide some short-term relief to the euro after four consecutive weeks of declines. If the data disappoints, investors will definitely increase their bets on the ECB to cut interest rates by 50 basis points in December, further weighing on the euro.
For the pound, the currency has also been sluggish recently, despite the Bank of England being one of the more hawkish central banks at the moment. Having already lost the 1.3 level against the dollar, the currency could see more downside next Wednesday when Chancellor of the Exchequer Rachel Reeves announces the first budget of the new Labour government. There are signs that Reeves will unveil £40 billion of tax increases and spending cuts, raising the tax burden to its highest level since 1948. While this may not be good news for taxpayers, it may be welcomed by Bank of England policymakers, as tighter fiscal policy will dampen demand in the economy, paving the way for faster rate cuts, leading to further downside for the pound in the short term. But if investors realize that the UK government is focusing on long-term investment and keeping the deficit in check, then the pound could find some support.
As the RBA maintains a neutral stance on interest rates, traders will be watching Australia's CPI data on Wednesday. After a small increase earlier in the year, Australia's inflation finally started to move in the right direction during the summer. Its weighted CPI annual rate is expected to fall further to 2.3% in September from 2.7% in the previous month, hitting the RBA's 2-3% target range for the first time since 2021. Quarterly data, which is considered more accurate, will also surely form the basis of the RBA's discussion at its November 5 meeting. However, even if more good progress is made in reducing inflation, the RBA is likely to remain cautious for now and at best start discussing when to start cutting interest rates. For the Australian dollar, the hawkish RBA will also provide very limited support for the Australian dollar if broader market risk sentiment remains fragile and the US dollar remains strong.
Important events: When will the Israeli-Iranian revenge cycle end? The US election is full of uncertainty
Israel began to attack Iran in the early hours of Saturday morning local time in retaliation for Iran's massive ballistic missile attack on October 1. Israeli media reported that the Israeli military strikes against Iran were mainly divided into three waves, targeting Iranian military targets, etc. According to sources, Israel informed Iran of the attack locations in advance and warned the other side not to retaliate. Iran's air defense department said that most of the attacks were intercepted and only caused limited damage. Market sources said that Iran notified Israel through foreign mediators that it would not respond to the attack. The Iranian Foreign Ministry said that Iran "has the right and obligation to defend itself against external aggression." A senior US government official said that "the direct exchange of fire between Israel and Iran should end here."
If the cycle of retaliation between Israel and Iran does indeed stop here, crude oil may give up some of its geo-premium. Tim Snyder, chief economist at Matador Economics, said, "Geopolitics is the dominant force in the current market, otherwise we are just waiting to see what happens in the (US) election and where that will drive the market." In addition, concerns about the potential increase in oil supply (especially from OPEC+ members) and expectations of slower demand growth have curbed the upside of oil prices to a certain extent. The current market dynamics reflect the complex interaction between geopolitical tensions, political uncertainty and basic supply and demand factors, all of which have led to continued volatility in oil prices.
As the decisive moment draws closer for Americans to vote for a new president, uncertainty is growing about who will win on November 5. While Harris still leads in most polls, her lead has shrunk significantly over the past ten days, with voters' intention to vote for Trump rising sharply. Betting markets are betting that Trump is more likely to win, which may be a picture that deep-pocketed Trump supporters are trying to shape, or it may be distorted by sampling bias, as Trump supporters overall may be more likely than Harris of supporters are more likely to place a bet.
The two candidates' agendas on policy haven't changed much since we last reported on them. Trump is proposing big across-the-board tax cuts, while Harris is prioritizing low-income workers and small businesses. Harris' other economic proposals include supporting first-time homebuyers and ending grocery price gouging. Trump has no specific policies for the cost of living crisis, but has pledged to "end inflation" and lower interest rates, raising questions about the independence of the Federal Reserve in a second Trump term. This could be a difficult challenge for Trump, as raising tariffs was a centerpiece of his campaign.
In any case, the biggest uncertainty is whether the candidates' policies will eventually pass Congress, which will depend on the composition of the Senate and the House of Representatives, as well as the fiscal situation of the United States. This will be the more important outcome for financial markets. Regardless of who is president, a divided Congress is seen as the safest outcome.
Company earnings reports: The busiest week of earnings season is here. Can the U.S. stock market's rally engine continue to gain momentum?
Next week is the busiest week of the third-quarter earnings season as a whole, with more than 150 S&P 500 companies reporting results, including five of the "Big Seven" companies, including Alphabet, Microsoft, Meta, Amazon and Apple. Due to the huge market capitalization of these companies, they together account for 23% of the S&P 500 index, which means that the market's reaction to their results may affect the broader index in the coming days.
So far, earnings momentum has been positive for U.S. public companies. Of the S&P 500 companies that have reported results, 36% have beaten earnings expectations, consistent with the outperformance in previous quarters. The S&P 500's price-to-earnings ratio based on earnings expectations for the next 12 months is 21.8 times, close to its highest level in more than three years, according to LSEG Datastream. The average forward price-to-earnings ratio for the "Big Seven" is as high as 35 times, as these companies' overall profit growth has been much higher than the rest of the S&P 500, but that gap is expected to narrow in the coming quarters.
For many observers, there are reasons to be optimistic about U.S. stocks. When the market is unusually strong in September and October, it usually rebounds at the end of the year, especially in an election year. Even now, some investment banks are raising their 2024 targets. Nicole Inui, head of equity strategy at HSBC, raised her year-end target for the S&P 500 to 5,900. She cited the "Goldilocks" reasoning that strong economic growth, easing inflation and a broadening rebound in large technology stocks are paving the way for the bullish scenario to come true.
Article forwarded from: Jinshi Data
