Markets in a minute 9th October 2023

MARKET RUCTIONS

There were significant moves in global financial markets last week and its worth reflecting on them.

• Equities: The S&P 500 was up by 0.5% (MTD 0.5%, YTD 13.6%), while the Euro Stoxx 50 fell by -0.7% (MTD -0.7%, YTD 12.6%). Concerns over tighter financial conditions weighed on stocks for most of last week, but a rally after strong US labour-market data countered this.
• Bonds: Yields rose across the curve (bond prices fall as yields rise), with the 10-year real yield (nominal yield minus inflation) rising to a 15-year high of 2.48% and indicative of tight financial conditions.
• Currencies: The US dollar index rallied to its highest level since November 2022 early in the week, but gave up those gains later in the week to finish down slightly (-0.1%).
• Commodities: Oil declined sharply, with Brent crude falling to as low as $83.4/barrel from a recent high of $97.7, as higher rates were viewed as a growth headwind. Brent ended the week down by 10.7%.
• BOTTOM LINE: 'Higher for longer' rates and concerns over fiscal deficits have driven bond yields higher since August. Rising real yields, indicative of tighter financial conditions, have been a key driver behind recent equity falls. Economic data and central bank communications are likely to remain front and centre for markets.

US labour-market data were indicative of a market in rude health. August job openings rose by 0.8mn to 9.6mn, compared to an expected decline to 8.8mn. September non-farm payrolls showed that 336K jobs were added, well above consensus expectations of 170K. Moreover, figures for July and August were revised up by a total of 119K, again illustrating robust job creation. Average hourly earnings rose by 4.2%, down from 4.3% in August.

Eurozone data was somewhat mixed, with retail sales down by 1.2% m/m, below market expectations. German factory orders rose by 3.9% m/m in August, more than double the projected rate of 1.5% and followed a sharp 11.3% fall in July. Orders for June through August rose by 4.9% from those in the previous three months (March to May).

US fiscal concerns also remained, even after a shutdown was avoided as the government will be funded through mid-November. Republican House Speaker McCarthy was ousted, raising uncertainty around negotiations next month over the budget.

Continued strong data pointed towards tighter financial conditions being necessary for longer to tame inflation. Nominal yields rising significantly above inflation - that is, positive real yields - suggests that conditions for repaying debt are now more onerous than a few months ago.

This week, focus is set to be on US releases including tomorrow's small business survey, September Fed meeting minutes (Wednesday), consumer prices (Thursday) and consumer sentiment (Friday) in order to gauge the path for economic growth and monetary policy in Q4.