Markets rallied strongly at the beginning of the week as the UK government backtracked on its plan to cut the 45% tax band for higher earnings, whilst softer economic data out of the US gave hope of a pivot in the interest rate cycle. However, the rally paused mid-way through the week, whilst investors wait for the latest US jobs data report, the non-farm payrolls, due out today at 1.30pm London time. Expectations are for 250,000 new jobs to have been created in September, down from 315,000 in August.
As of 12pm on Friday, London time, US equities had rallied by 4.4% over the week, with the technology sector rising 4.7%. European equities increased by 2.3%, with UK equities advancing 1.7%, both held back by a greater probability of a recession and heightened concerns over the willingness of Russia’s President Putin to use nuclear weapons on the battlefield in Ukraine. Japanese stocks rose by 3.9%, whilst the Australian market was up 4.5%. Emerging markets increased by 4.0%, with Latin American stocks rising by a massive 8.9%.
Government bonds staged a strong relief rally at the beginning of the week after the Conservative party’s partial climb down on its unfunded tax cutting agenda. This was closely followed by the latest new jobs opening data out of the US, which reported 10.1 million job openings in August, lower than the 11.2 million reported in July and beneath forecasts of 10.8 million. This led to a rally in government bonds, with yields, that move inversely to price, falling from 3.80% on the 10-year US Treasury to 3.56%. However, the buoyant mood was short lived as investors questioned the idea of an imminent pause in the US hiking cycle. This was reinforced by an interview on Thursday with the Chicago Fed’s President, Charles Evans, saying rates will probably rise to 4.5% or 4.75% next Spring before pausing. By the end of the week 10-year US Treasury yields ended up higher than at the start of the week, at 3.84%. It was a similar story for German bunds and UK gilts, with the mid-week rally vanishing. German bunds are currently yielding 2.16% and UK gilts 4.20%.
Gold rose over the week by 2.7%, now trading at $1,717 an ounce, as markets anticipate a pause in the rate hiking cycle, whilst also offering haven status should the Ukraine Russian war escalate further. Crude oil rose sharply as Opec+ (Organisation for Petroleum Exporting Countries plus Russia) agreed a cut by 2 million barrels a day in response to the recent slide in oil prices. Although in truth, it’s not clear what impact this will have in the medium term as the Opec+ countries are already producing less oil than their quotas allow. Brent crude rose by 8.6%, now trading at $95.5 a barrel, whilst US WTI (West Texas Intermediate) jumped 12.6%, currently priced at $89.5.
The sharp move upwards in markets this week underlines how much investors are trying to second guess a pivot in the Fed’s monetary policy stance. Investors are aware, historically speaking, how quickly markets have rallied at this inflection point. However, we need to be mindful that inflation remains at very elevated levels versus recent history, and that even if the US employment picture is weakening, the forecasts still remain at very robust levels.
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