Weekly recap
What happened in markets
The Australian sharemarket enjoyed gains last week, as it rose 0.8%. Volatility was experienced throughout the week, as tensions continued in the Middle East, which again impacted commodity prices, as the price of oil rose 1.2%. Losses were seen within the Materials sector (-1.4%), following weakened sentiment towards the Chinese stimulus measures. Within the sector, BHP conceded 3.1%, while Rio Tinto lost 3.4%. The Financials sector was amongst the best performers, as September’s RBA minutes showed it is unlikely the current policy settings would change until early next year. As a result, Westpac added 2.4%, ANZ gained 1.9% and Commonwealth Bank rose 2.2%.
US sharemarkets were higher over the course of the week, as the S&P 500 gained 1.4% and the NASDAQ increased 0.3% to both record their fifth straight week of gains. The past week saw the release of the Consumer Price Index, which came in slightly hotter than market expectations, due to increases in airline fares and vehicle insurance. The Financials sector again outperformed, following positive earnings reports from some of the major banks. As a result, JP Morgan added 5.4%, while Wells Fargo & Co increased 6.6%. The major technology stocks also finished the week in the green, as NVIDIA Corporation jumped 7.9%, Apple lifted 1.4%, while Micron Technology added 4.5%.
European sharemarkets were also higher, following losses in the week prior. Expectations for a further 0.25% rate cut by the European Central Bank lifted investor sentiment. The Travel & Leisure sector added 1.3%, while Telecommunications rose 1.3% and Financial Services added 0.9%. Weakness was seen within the Basic Resources sector, caused by its exposure to China following recent Europe and China trade disputes. As a result, London-listed Rio Tinto shed 2.4% and Glencore dropped 2.1%.
Stock & sector movements
What caught our eye
Stronger-than-expected economic data recently released in the US has muddied the waters when it comes to the world’s largest economy’s inflation and interest rate saga. Over the past few weeks, we have seen upside surprises to consensus estimates in both employment and Consumer Price Index (CPI) data. This raised some questions around whether the US Federal Reserve’s decision to cut interest rates so aggressively in September, by 0.50% to 4.75%-5.00%, was indeed necessary and the right move.
The most notable upside surprise we saw came in the form of non-farm payrolls growth, which jumped 254,000 when compared to the 145,000 expected in September, leading the US unemployment rate down to 4.1%. Interestingly, prior to this strong September result, we had actually seen a string of softer jobs market data! So much so that it triggered calls for the Fed to deliver the outsized interest rate cut, which it did, based on the information available at the time. Now, it looks as though this might not have been necessary and the decision to reduce the cash rate target by so much could delay reduced inflation.
The potential for a delayed reduction in inflation was supported by the subsequent CPI print released late last week. While perhaps too early to draw conclusions, the result showed prices, excluding volatile items like food and energy, had risen 3.3% over the year. This was slightly higher-than-expected and bucked the recent downward trend.
Despite this news, it is likely the Fed will still cut interest rates by 0.25% in November and again in December. The latest probabilities priced-in imply a roughly 85% chance each of these cuts will occur. Meanwhile, looking at the Fed’s September dot plot, market expectations remain in-line with the median projection. This may be seen as optimistic, as we must remember the Fed made those projections prior to the above stronger data. Though, further out into 2026 and 2027, market participants expect a higher cash rate than the Fed’s dot plot would suggest.
As mentioned, it is too early to draw any conclusions. One or two datapoints do not constitute a trend after all. However, if strength in the US labour market continues, inflation may take longer to come down to the Fed’s target of 2% and interest rates may not fall as quickly as hoped.
The week ahead
In Australia, we gain further insight into the strength of the economy following the release of the latest Unemployment Rate result.
Internationally, we will gain an insight into the current inflation level in the UK, through the release of the Consumer Price Index, along with the Unemployment Rate. In the US, Retail Sales data will show how increased interest rates are impacting consumers spending levels.
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