BentinPartner Weekly
US stocks closed last week mostly unchanged with Friday’s stunning beat on US Non-Farm Payrolls serving as the week’s saving grace (for closing in the green).
With all the credibility left to a data feed that showed a cumulative 1-year 800k ghost job creation a couple of months ago, we half-jokingly said on Wednesday that we thought the job number would be strong, now that the Fed is firmly engaged on the easing path with no intention to disappoint market expectations ahead of the Presidential elections.
Well, Friday’s job report did not disappoint either and delivered a stunning 245k NFP job creation which put the narrative of an upcoming soft or hard landing firmly on the back seat. The likely consequence will be that the Fed may not deliver a 50bps cut in November and rather stick with the 25bps cut that is now expected, with a 99% probability, according to Fed funds (in line with what J. Powell also suggested before the NFP report).
However, each passing month brings reasons to be cautious about that job number. Lately it was an explosion in temporary jobs or the fact that many people need to have “two” jobs to make ends meet. This month, it was the fact that out of an overall buoyant employment creation, a massive chunk was from Government hiring and seasonal adjustments (which soared by 785K, from 21.421mn to 22.216mn, or “the biggest monthly surge in government workers on record, excluding the reversal of the record plunge from the previous Covid collapse”, ZH reported. Average Hourly Earnings also climbed 4.0% yoy whilst over the two-decade period 2000 through 2019, annual growth in Average Hourly Earnings averaged 2.5% - with a high of 3.6% during December 2008, ZH also noted.
That said, the Institute for Supply Management’s index of services also advanced 3.4 points to 54.9 last month, exceeding all projections. Furthermore, US job openings unexpectedly increased in August after two straight monthly decreases and the ADP report issued earlier in the week came out stronger than expected.
The positive market response to the job report was a Goldilocks surge in US equity markets on Friday which had been earlier catalysed by another leg higher in Hong Kong and Asian markets and the US port strike ending with a 61% salary increase distributed over several years.
The focus will now shift towards the earnings seasons starting this week and the approaching Presidential elections which could exacerbate and accelerate geopolitical developments as well.
The dollar surged but bond markets could not play ball and yields gapped higher across the curve with 10Y yields jumping 20 bps on the week and 2Y yields surging 31 bps to 3.94%, mostly as a result of Friday’s adverse bond price action. The market expectations ended the week pricing a 55bps cut for the end of the year and 154 bps cut by the end of 2025, according to fed funds.
Precious metals were volatile, trading lower (as usual on a strong job print) before getting bought back violently to close unchanged.
Without much impact felt on global markets (except for a late spike in oil prices), the situation in the Middle East was aggravated with each passing day last week as the battleground expanded towards Lebanon and Syria (where some Russian assets were also hit) as Netanyahu kept playing his advantage with mounting speculation that he may now be seeking to politically destabilize Iran after inflicting a severe blow and neutralizing a large part of Iran’s backed Hezbollah. The Iranian nuclear installation likely remains an irrepressible temptation for Netanyahu but so far, the US President was able to hold his horses, suggesting instead a strike on Iranian oil facilities… which is what caused oil to spike 6%.
D. Trump opined to get it over with and strike Iranian nuclear facilities (Israel already assassinated the chief Iranian scientist in charge of the program a while back). With no development pointing towards appeasement in the Middle East, it would take an eternal “optimist” (and arsonist) like J. Stoltenberg, the former head of NATO to believe that “red lines can get crossed. and that nothing ever happens” (See interesting article from the FT on the former NATO Chief).
The focus will shift towards the new earnings season starting next week (and the upcoming elections) and with analysts having revised earnings lower quite aggressively, the odds are high that stocks will beat on those lowered expectations (which have done 75% of the time since 2007 according to analysts).
Our view for the sp500 remains bullish until after the election at least, but we look at Asian (including Chinese) markets and EM markets with renewed confidence that stocks will keep outperforming bonds that are not properly remunerating inflation risks that will likely resurface, boosted by monetary easing (and not only by the Fed), wage pressure and a new bullish commodity cycle. Instead, gold and silver will remain part of the winning mix for quite some time, in our view, supported by the risk of a looming debt overhang and continued central bank buying linked to de-dollarization (which does, can and will occur even with a strengthening dollar from time to time). So far this year, the Hang Seng China Enterprises is now up 37% YTD, the best performing market in ‘24, supported by perfect mix of a bearish positioning (with big investors remaining sceptical), a bearish view on the economy (deflationary hard landing) and a policy shock of 3% of GDP.
Crude prices surged 9.1% this week to $74.38 while the Bloomberg commodities index rallied almost 9% as well and other developments pointing to upward pricing pressures including Brazil’s worst-ever drought in Brazil and the UN FAO's food price index rising 3% in September from August or the fastest rate in 18 Months in September.
We should also give significant weight to China’s recent “whatever it takes” moment when assessing inflation risk.
Over the past week, the S&P500 gained 0,3% (20,5% YTD) while the Nasdaq100 gained 0,1% (19,0% YTD). The US small cap index dropped -0,5% (9,2% YTD). AAPL dropped -0,4% (17,8%).
The Equally Weighed SP500 dropped -0,2% (13,2% YTD), underperforming the S&P500 by -0,5%. The median SP500 YTD return closed the week at 13,3%.
Cboe Volatility Index rallied 13,3% (54,3% YTD) to 19,21.
The Eurostoxx50 sold off by -2,2% (12,5%), underperforming the S&P500 by-2,5%.
Diversified EM equities (VWO) gained 1,7% (19,4%), outperforming the S&P500 by 1,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies rallied 2,1% (5,8%, Z-score 2,8) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,5% (2,3%).
10Y US Treasuries underperformed with yields rising 22bps (9bps, Z-score 2,9) to 3,97%. 10Y Bunds climbed 8bps (19bps) to 2,21%. 10Y Italian BTPs underperformed rising 6bps (-19bps) to 3,51%, outperforming Bunds by -2bps.
US High Yield (HY) Average Spread over Treasuries dropped -15bps (-39bps) to 2,84%. US Investment Grade Average OAS dropped -5bps (-14bps) to 0,91%.
In European credit markets, EUR 5Y Senior Financial Spread was unchanged (-1bps) to 0,66%.
Gold dropped -0,2% (28,6%) while Silver rallied 2,0% (35,3%). Major Gold Mines (GDX) sold off by -2,0% (27,5%).
Goldman Sachs Commodity Index rallied 4,1% (5,4%). WTI Crude rallied 9,1% (3,8%, Z-score 2,1).
Overnight in Asia…
S&P500 -3 points; Nikkei +1.8% ; CSI300 closed; Hang Seng +0.3%
Israeli airstrikes continued to hammer Beirut into Sunday, with the Israel Defense Forces calling them "pinpoint" attacks, but which has left Lebanese civilians in the capital in a state of panic, Reuters reported. The FT and others have called it the heaviest night of bombing on the Lebanese capital to date with the IDF saying it has hit 150 Hezbollah targets in the past 24 hours, including a building near a key road leading to Lebanon's international airport. Lebanon cannot become another Gaza, French President Macron said on Saturday calling for suspension of arms sales to Israel.
Inflation fell below the ECB’S 2% target in September and the core measure of price increases should gradually recede close to that level in 2025, the Bank of France chief said in an interview with La Repubblica. He also said that market expectations for inflation in 2025 are below 1.8% — even lower than the ECB’s forecast. “All this means that the balance of risks is shifting,” he said.
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