“After a turbulent week, the market’s bounce back brings a sense of relief, but all eyes now turn to the Federal Reserve as investors brace themselves for a pivotal week dominated by the central bank’s decisions and announcements.”
Another Monday bounce in world markets sets up a Fed-dominated week ahead – although the U.S. central bank may not yet have a great deal to offer stock and bond markets that seem keener to see the glass half empty as October comes to a close.
A worrying late-year stock market unwind is starkest in small-cap indexes (.RUT) now tracking year-to-date losses of some 7% – even as the benchmark S&P500 (.SPX) remains up 7% and Big Tech leaders of the Nasdaq 100 are still 30% (.NDX) higher.
Tech stocks gained on Friday (.IXIC), for example, even as the Russell 2000 lost more than 1% on the day to hit its lowest since 2020.
Even though incoming third-quarter earnings seem like a mixed bag – mainly because of some large individual stock losses due to investors’ high bar for 2024 outlooks – the aggregate actually looks quite impressive.
Annual earnings growth for S&P500 companies is now expected to have picked up to a 4.3% annual growth rate, according to LSEG estimates, from as low as 1.6% before the reporting season began. And 77% of companies have beaten Wall Street forecasts.
A big problem for small firms, however, is that they disproportionately bear the burden of the higher borrowing costs that show little sign of coming down any time soon.
The Federal Reserve delivers its latest policy decision on Wednesday and is widely expected to keep rates unchanged for the second straight meeting. Although futures see less than a 50% chance of another rate rise in the cycle, they don’t seen a cut coming until June at the earliest.
And even though third-quarter U.S. economic growth raced ahead an annualised 4.9%, many now see that too as a high watermark – with GDP models seeing fourth-quarter growth at less than half that rate for now.
A key input to that as always will be the state of the labor market, with data this Friday expected to show October payroll growth cooling to 188,000 new jobs from the blowout 336,000 gain last month. And autoworker strikes against Detroit’s Big Three car manufacturers could subtract at least 29,000 jobs from October, government data shows.
But beyond Fed policy rates, it’s the restive bond market and near 16-year-high long-term borrowing costs that are starting to hurt most. As much concern as there is with the slew of new government debt coming down the pike, a key moment this week may well be the Treasury’s quarterly refunding plans today and Wednesday.
For now at least, market concern about the tense Middle East conflict has allowed some relief. Even though Israel’s land invasion of Gaza appears to be under way amid heavy fighting and a dire humanitarian crisis, demands for some aid-related ceasefire are growing.
Global bourses and Wall St futures were higher to start the week, with oil and gold prices ebbing a bit – the former now back down 4% year-on-year.
Apple (AAPL.O) dominates the week’s earnings diary on Thursday. HSBC HSBA.L gained 1.2% in London after reporting a fresh $3 billion share buyback and a more than doubling of third-quarter profit.
U.S. 10-year Treasury yields held steady at 4.85% – well below the 5% threshold they breached last week.
The dollar (.DXY) was a touch higher, with the Swiss franc ebbing as the Swiss National Bank cut the rate on overnight deposits it pays on commercial bank reserves.
The yen was firmer as Japanese government bond yields climbed to fresh 10-year peaks near 0.9% on Monday, with markets weighing the chances of another policy tweak in Tuesday’s latest monetary policy decision from the Bank of Japan.
In Europe, data showed Germany’s economy contracted by a smaller-than-forecast 0.1% in the third quarter but October inflation numbers showed a sharp easing of price pressures.
In Hong Kong, a court gave China Evergrande (3333.HK) a five-week reprieve to come up with a deal with creditors or face liquidation after the embattled developer said on Monday it was working on a revised debt-restructuring plan.
Key developments that should provide more direction to U.S. markets later on Monday:
– Dallas Fed manufacturing survey
– U.S. corporate earnings: McDonald’s, Loews, Western Digital, FMC, Arista Networks, Welltower, VF, Revvity, Simon Property, Healthpeak, Arch Capital, ON Semiconductor
– U.S. Treasury auctions 3-, 6-month bills
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