Making sense of macroeconomic and market moves and what the shifting landscape means for investors.
Top stories
- Japanese Prime Minister Sanae Takaichi announced a ¥21.3tn ($135.4bn) stimulus package designed to spur economic growth and protect households from rising living costs. The package is the largest stimulus since the Covid-19 pandemic. It involves ¥17.7tn of spending, backed by a supplementary budget some 27% larger than that secured a year ago by Shigeru Ishiba. The biggest portion will go to price relief, totalling ¥11.7tn. This will include ¥7,000 subsidies for gas and electricity bills per household over three months, and one-off payments of ¥20,000 per child. Japan’s cabinet office said the measures to suppress energy prices were expected to push down inflation by 0.7 percentage points from February to April. Longer dated Japanese bond yields have climbed to record highs on expectations of the stimulus announcement and the additional government borrowing that would result.
- October’s Federal Reserve minutes showed members were “strongly divided” on the direction of monetary policy. The showed deep divisions on the need for a third rate cut this year, stating “in discussing the near-term course of monetary policy, participants expressed strongly differing views about what policy decision would most likely be appropriate at the committee’s December meeting.” The meeting saw the Fed cut rates by 25 basis points but the vote was split three ways. Minutes showed that “most participants judged that further downward adjustments to the target range for the federal funds rate would likely be appropriate” but “several of these participants” indicated they felt December might be too soon for a further cut.
By the numbers
- 3.6% – UK inflation in October, down from 3.8% year on year in September and in-line with the Bank of England’s expectations, albeit slightly above market consensus. Services inflation eased to 4.5%, but food inflation climbed to 4.9%. Market expectations for the Bank of England to cut rates in December moved higher, pricing an 87% probability of a 25-basis point cut.
- -1.8% – the annualised contraction in the Japanese economy per the first reading of third quarter GDP. This was the first contraction in six quarters, driven by a fall in exports, but was ‘less bad’ than consensus expectations of -2.5%.
- 119,000 – the jobs created in the US in September, as the delayed employment report was released. The figure was better than expected, but the unemployment rate rose to a four year high of 4.4%. The government shutdown means a limited report will be released alongside the November jobs report – but not until 16 December – after the next Federal Reserve meeting. A ‘data dependent’ Fed will be missing some very important data when they meet.
Market movers
What should we make from the recent tech led sell off in US equities? Firstly, some context. The S&P500 index peaked on the 28th of October, having rallied 38% from the lows on the 8th of April. Since the 28th of October, the index is down 5.11%, though the move in some of the tech names is more dramatic. Meta is down 21.5%, Nvidia is down 14.7% (despite strong earnings and forward guidance this week) and Oracle is down 25%. Two things appear to have changed the market mood. Firstly, reduced expectations for an interest rate cut in the aftermath of the Federal Reserve meeting. Per Fed Fund Futures, the probability of a December cut has dropped from 100% on 28 October to 35% today. Secondly, the recent round of earnings reports from the mega cap tech companies has shown that while companies are generating huge revenues, their significant investment in AI is causing some concern.
The market does appear more discerning on the size of capital expenditure with a little more scepticism emerging over the return on investment. Equally the shift from investment funded from cashflow to more of a mix involving additional borrowing appears to have been taken negatively. While the overall move lower is relatively minor, the pause and subsequent reversal in market momentum is a useful reminder that markets do not go up in a straight line, that not all capex is the same and ‘winners’ and ‘losers’ will emerge. While AI may well be transformative over time, not every company currently investing billions will reap the rewards.
We remain constructive overall on the basis that economic fundamentals remain benign, earnings growth expectations are solid looking forwards, and even if we do see a Fed ‘pause’ in December, the direction of travel in US interest rates is still lower.
The investment lens
The calm before the storm? Last week ended with plenty of volatility in UK Gilts after Chancellor Rachel Reeves decided to cancel a planned increase in income tax. The move was perceived as a political decision from a position of weakness. The 10-year Gilt yield trended higher after the Financial Times broke the news. The volatility was the largest since a brief outbreak of speculation around Rachel Reeves’ position in early July and took place at the end of a week in which there was renewed chatter about a leadership challenge to the Prime Minister. The government said the decision to ditch the income tax increase was driven by a more positive fiscal outlook from the OBR, citing an improve outlook for tax revenue and wages. This week has seen the government finally go quiet after weeks of briefings and the ‘kite flying’ of potential policies ahead of the budget. The FT reported the Chancellor has shifted away from manifesto breaking tax hikes towards the so-called ‘smorgasbord’ approach of increasing a range of taxes, expected to include high end properties, pension contributions and gambling. All will be revealed next week, in the most anticipated UK budget… since the last one.
