RECAPPING LAST WEEK
Despite a sense of relief from the longest government shutdown in U.S. history finally coming to
an end, equity indices finished with mixed performance as technology stocks were pressured by
valuation concerns and Federal Reserve officials suggested reticence on further rate cuts. The
Russell 2000 dropped nearly 2%, while the Nasdaq Composite fell 0.5% and the S&P500 was flat.
Sector performance tilted negative, but healthcare jumped nearly 4%, continuing its strong run
that began in early October. Gold futures rallied more than 5% before fading modestly to end the
week higher by only 2%, while oil prices were little changed. Risk assets jumped to begin the week
due to the shutdown’s imminent end, but optimism faded as investors recognized that a number
of appropriations bills must be resolved by January 30th in the face of deep political divisions to
avoid another stoppage. U.S. Treasury yields rose after 10– and 30–year auctions saw slightly
weaker than normal demand, and after several Fed officials took a hawkish tone in comments.
There was a growing sense that the central bank could pause rate cuts until more clarity on the
economy emerges. The White House said that employment and inflation data for October may
never be released, and questions remain about when other delayed reports could be available.
Odds for a December rate cut settled near 46%, according to fed funds futures. Turning to
economic data, payroll processer ADP estimated that U.S. firms were shedding more than 11,000
jobs a week through late October, pointing to further weakening in the labor market. Small
business optimism fell for a second straight month as labor quality remained the top concern for
owners. Private analytics firm Circana estimated that U.S. retail sales grew 2% last month. While
that figure supports the resilience of consumers facing numerous challenges, their willingness to
spend may be tested heading into the important holiday shopping period. Overseas, China’s
industrial production and retail sales grew at the slowest pace in more than a year last month,
rising 4.9% and 2.9%, respectively. The country’s export–driven economy may experience
increased risks to growth as trade issues with the U.S. and weak domestic demand persist.
Eurozone GDP expanded at a moderate 0.2% pace in Q3 while the trade surplus surged on a
large jump in shipments to the U.S. Finally, the British economy grew just 0.1% in Q3, short of
expectations. The UK jobs market cooled noticeably, bolstering anticipation for a Bank of England
rate cut next month.
THE WEEK AHEAD
Volatility in technology stocks is likely to continue as investors gear up for Nvidia’s next earnings
report on Wednesday after market close. Expectations are high going into the news, given that the
world’s largest company by market value has a history of exceeding analyst forecasts and raising
future guidance. There are also earnings reports due from U.S. retail giants Home Depot, Target,
and Walmart—the last of which just announced the retirement of its CEO. On the economic
calendar, there is still much uncertainty around when and if U.S. data releases will resume—
information that is critical to the Fed’s rate decision next month. Late last week, the Bureau of
Labor Statistics announced that the September jobs report will be released this Thursday.
Minutes from the prior FOMC meeting will arrive on Wednesday, but recent comments from
committee members have taken precedence on how the central bank’s views are evolving. There
are important non–government data points this week for investors to consider, including flash PMI
results for early November, regional manufacturing surveys, existing home sales, and revised
consumer sentiment figures. On the international side, the flash PMI surveys from Europe and
Australia will also garner attention at week’s end. Japan releases its preliminary Q3 GDP number
as well as an inflation update. The sinking value of the Japanese yen may pressure the Bank of
Japan to raise rates sooner rather than later, so Thursday evening’s CPI report takes on added
significance. Wednesday’s UK CPI release is expected to reveal a cooling to 3.6% YoY from 3.8%,
a result that would further support a rate cut in December.
(Schwab)
