Markets Last Week - 01/11/2024

U.S. Markets

The Nasdaq Composite and S&P MidCap 400 Index hit record intraday highs midweek but saw significant declines on Thursday. Growth stocks underperformed value stocks, in part due to cautious earnings reports from Meta Platforms and Microsoft. Small-cap stocks performed better than large-caps.

Approximately 42% of S&P 500 companies were expected to report third-quarter earnings this week, including major tech names like Meta, Microsoft, Alphabet, Apple, and Amazon. By Friday, analysts surveyed by FactSet anticipated a 5.1% year-over-year rise in S&P 500 earnings, up from 4.3% which was before the pre-reporting season.

Labour market data presented mixed signals, with reports impacted by Hurricanes Helene and Milton and a strike by Boeing workers. The Labor Department reported a drop in job openings to 7.44 million in September, the lowest since January 2021, while voluntary quits remained stable. Private payroll data from ADP surprised markets with a 233,000 increase in October jobs, double the expected figure. However, the Labor Department's nonfarm payroll report showed a modest increase of just 12,000 jobs in October, reflecting Boeing’s strike impact on manufacturing jobs and weak hiring in other sectors. Average hourly earnings rose by 0.4% in October, slightly above expectations.

Manufacturing data continued to soften, with the Institute for Supply Management’s manufacturing index falling for the seventh consecutive month to 46.5, the lowest level in 15 months. The Institute’s chair noted subdued demand and companies’ reluctance to invest amid inflation and policy uncertainty.

Despite weak economic data, the 10-year U.S. Treasury yield reached a four-month high of 4.37% on Friday, as inflation and growth concerns persisted. Traders noted caution in the municipal bond market ahead of the upcoming presidential election, while spreads in the investment-grade corporate bond market widened slightly by week’s end. In high-yield markets, volumes remained above average, but issuance slowed as companies awaited election results.

UK

In the first Labour government budget in 14 years, UK Chancellor of the Exchequer Rachel Reeves introduced an additional GBP 70 billion in spending over the next five years. This will be funded through GBP 40 billion in tax hikes and GBP 32 billion in extra borrowing, with fiscal rules adjusted to accommodate this increase. The Office for Budget Responsibility responded, warning that higher taxes could hinder long-term growth, and revised its economic growth forecast to just over 1% for this year and 2% for next year.

Amid a bond market sell-off sparked by the budget, Reeves sought to reassure cautious investors, emphasizing that the Labour government’s “number one commitment” is “economic and fiscal stability.” She affirmed, “we have now put our public finances on a stable and solid trajectory.”

Europe

The pan-European STOXX Europe 600 Index declined by 1.52% in local currency, weighed down by concerns over potential Middle East conflict escalation, disappointing corporate earnings, and tempered expectations for European Central Bank (ECB) rate cuts. Key national indexes also saw declines: France’s CAC 40 fell 1.18%, Germany’s DAX dropped 1.07%, Italy’s FTSE MIB slipped 1.42%, and the UK’s FTSE 100 was down by 0.29%.

Eurozone economic growth picked up in the third quarter, expanding by 0.4%—double the 0.2% growth rate recorded in Q2 and surpassing estimates. Germany defied recession fears with a 0.2% expansion, while France and Spain also posted stronger-than-expected growth. However, Italy’s economy remained flat.

Inflation in the euro area rose slightly in October, with annual headline inflation increasing to 2% from 1.7% in September as the impact of last year’s energy price drop receded. Services inflation held steady at 3.9%, while core inflation, which excludes energy, food, alcohol, and tobacco, remained unchanged at 2.7%.

Japan

Japanese stocks rose, with the Nikkei 225 and TOPIX indexes gaining over the week, as the Bank of Japan kept rates steady amid political uncertainty. Following a loss of its lower-house majority, the ruling coalition must work with smaller parties to retain control, adding uncertainty to Japan’s economic outlook. The yen weakened initially due to the election outcome but stabilised following Bank of Japan Governor Ueda’s comments on potential rate hikes, which suggested a less dovish stance. Japan’s 10-year bond yield remained stable at around 0.95%.

China

Chinese markets saw declines, with the Shanghai Composite and CSI 300 dropping despite improving economic indicators. Official data showed manufacturing activity expanded slightly in October, driven by increased demand, while the non-manufacturing PMI edged up due to holiday-related spending. New home sales showed growth for the first time in 2024, following stimulus efforts.