Weekly Commentary: 29 October 2024

Markets Last Week

Bond yields rose aggressively across developed markets as bets on interest rate cuts were pared back. The US 10-year Treasury yield rose 0.16% to 4.24%, while the UK 10-year Gilt yield rose 0.18% to 4.23%. At the end of September, Fed funds futures were pricing in eight rate cuts in the US by the end of next year; since then, the market has shifted to expect only five.

The softening expectations of interest rate cuts have come as economic data has surprised to the upside, pointing to a soft landing for the economy. In recent weeks the labour market in the US has shown resilience, and although unemployment has ticked up (previously triggering the Sahm rule – a recession indicator that uses the unemployment rate to signal when the US economy has entered a recession), this has been driven by people entering the workforce rather than layoffs. The softening of the labour market has also been driven by less hiring (evidenced by rising continuous claims last week), necessarily taking some of the heat out of the labour market, tempering wage growth, and crucially, driving disinflation. Simultaneously consumer spending has been strong, which has supported retail sales and the services economy, bolstering broader economic health towards a soft landing.

The bond market has recalibrated the number of rate cuts necessary given the continued strength of the economy, but inflationary pressures are still set to subside, which keeps the Federal Reserve (Fed) on track to cut rates, just more gradually and by less. The recalibration of this scenario in bond markets has made equity investors uneasy in recent days. However, a scenario where inflation decreases while the economy stays robust is probably the most favourable outcome for risk assets.

Global equities edged lower over the week: UK equities fell 1.3%, the US market dropped by 0.5% in sterling terms supported by a strong dollar, while Japanese equities fell 3.9%, not helped by a weak yen. Globally every sector ended in negative territory although health care, industrials and utilities were the worst performing while technology and consumer discretionary were resilient.

US election update

Trump has taken the lead in the polls as early voting started. Republicans are well positioned to take back control of the Senate. This scenario has contributed to rising long-term yields as markets price in the increasing probability of a Republican sweep.

The assumption that a Trump victory would be more inflationary than a Harris win is debated, with the real impact depending on the control of Congress and subsequent policy implementations – or ability to do so.

As the election draws closer, markets have begun to adjust for fiscal concerns, analysing the inflationary impact of various policies and worries about levels of issuance. This has led to heightened volatility at the long end of the bond market, reflecting investors uncertainty about the policy implications of both candidates.

The Week Ahead

Wednesday: UK Budget

Our thoughts: The first female UK Chancellor, Rachel Reeves is set to unleash extensive tax hikes (possibly up to £40bn) while simultaneously adjusting the government’s debt targeting methodology to increase the scope for borrowing (by c.£70bn).

Wednesday: US GDP

Our thoughts: Economic growth in the third quarter is expected to have remained consistent at a healthy 3% annualised pace. The resilience in the face of high interest rates comes from strong consumer spending supported by higher income cohorts in a bifurcated economy.

Friday: US employment data

Our thoughts: Economists expect that job creation slowed in October partly driven by hurricanes. The unemployment rate is anticipated to remain at 4.1%. Nonetheless given the recent focus on the labour market, any surprises in the October report could create notable reactions in markets.