RECAPPING LAST WEEK
U.S. equity indices ascended to new all-time highs after the delayed September inflation report
came in slightly lower than expectations. The S&P500, Nasdaq Composite, and Russell 2000
indices gained between 1.9% and 2.5%. Only the defensive utilities and consumer staples sectors
ended lower, while technology was the biggest gainer. Crude oil futures soared more than 7%
after the U.S. imposed sanctions on Russia’s two largest producers, causing India and China to
sharply cut their crude imports from Moscow. The action threatened to push up global oil prices
as Russia’s two largest customers were forced to seek alternative supplies. Gold futures stabilized
after their biggest drop in more than a decade on Tuesday, ending the week lower by 3.5%.
Investors were generally upbeat even as the U.S. government shutdown extended into a third
week and trade tensions with China showed little signs of abating. The much-anticipated
September CPI reading showed a monthly increase of 0.3%, putting the annual inflation rate at
3%. Since both numbers came in a touch below forecasts, investors were reassured that the
Federal Reserve would remain focused on the softening labor market, and therefore likely to
lower interest rates despite core inflation that remains above the Fed’s target. U.S. Treasury
yields ended the week modestly lower, with a 10-year yield weekly close below 4% for the first
time since late March. Turning to the limited economic releases available, U.S. business activity
brightened in October with S&P Global’s flash composite PMI rising to 54.8 from 53.9. The
services sector accounted for most of the improvement, but the overall outlook dimmed as price
pressures remained high. The final consumer sentiment index for this month slipped to 53.6,
underlining the persistent disconnect between sentiment surveys and hard data. The gauge for
current conditions fell to the lowest level since August 2022 as consumers remained frustrated by
high prices. One-year inflation expectations ticked down slightly to 4.6% but the long-term view
rose to 3.9% from 3.7%. In housing news, existing home sales rose 1.5% MoM in September with
a median sales price of $415,200—the 27th straight month of annual gains. Overseas, Japanese
stocks reached record highs and the yen slumped after conservative Sanae Takaichi was elected
as prime minister. The country’s core CPI rose to 2.9% last month from 2.7%, but investors
remained uncertain whether rising inflation would lead to rate hikes given the new government’s
potential dovish views on fiscal policy. In Europe, Germany’s strong private-sector growth more
than made up for France’s struggles, lifting Eurozone PMIs to the highest levels since May 2023.
Additional rate cuts this year from the Bank of England looked doubtful after CPI remained at
3.8% YoY and retail sales increased for a fourth consecutive month. Last of all, China’s industrial
production and export boom continued to drive solid GDP growth of 4.8% in Q3, but slowing retail
sales pointed to a concerning lack of domestic consumption.
THE WEEK AHEAD
Regardless of whether the government shutdown ends this week or not, the Federal Reserve will
be forced to make its decision on interest rates with an incomplete picture of the U.S. economy. It
may be difficult for market observers to square a resilient economy—evidenced by solid Q3 GDP
estimates and stocks at all-time highs—with a softening labor market. However, the contrast is
unlikely to prevent the Fed from cutting rates on Wednesday. Several important economic reports
that were due to be released after the Fed decision will likely not be—including that first estimate
of Q3 GDP and September’s core PCE price index. The continued lack of new data will put even
more emphasis on this week’s earnings announcements, with nearly 45% of the Nasdaq-100’s
and 25% of the S&P500’s respective market values due to report—including Meta, Microsoft, and
Alphabet on Wednesday, followed by Apple and Amazon on Thursday. Investors will be digging
into what these companies say about artificial intelligence, given the technology’s outsized
influence on equity valuations. On the international calendar, central banks will be in focus. The
Bank of Canada is expected to cut rates by 25 basis points, while the European Central Bank and
Bank of Japan are predicted to hold rates steady. Inflation updates from Australia and the
Eurozone are also on the docket. Finally, President Trump’s visit to Asia—culminating in a
scheduled meeting with Chinese President Xi on Thursday in South Korea—is a potential source
of market volatility as the two countries aim to manage disagreements and improve relations.
(Schwab)
