Last week review:
LOW INFLATION IS BUOYED BY EVIDENCE OF AN ECONOMIC SLOWDOWN. The S&P 500 and Nasdaq gained more than 2% over the past week, while the DJIA recorded a 2% gain which was the third consecutive week of gains on the back of slowing Inflation data released earlier last week, thus fueling optimism that the Federal Reserve’s interest rate hike has peaked. Economic data showed that US CPI (Oct.) grew 3.2% yoy, below analysts’ forecast of 3.3% and certainly slipping further from the previous month’s 3.7%. Core CPI also, which excludes prices of volatile goods such as food and energy, also cooled to 4.0% yoy, lower than both forecasts and September’s reading of 4.1%. Inflation at the producer level also slowed to a growth rate of 1.3% yoy in October, versus 2.2% in September, lower than the 1.9% forecast. This PPI release showed the largest price decline at the producer level in 3.5 years on the back of cheaper Oil prices. Another report adding to the optimism that the Fed will be able to cut rates sooner next year was Retail Sales (Oct.) dropping 0.1% mom, the first fall in 7 months, and in stark contrast to the previous month’s positive 0.9% growth. As known, the Fed has raised interest rates 525 bps since March 2022 to combat Inflation. Expectations that a rate cut could occur in May 2024 have risen to 65%, up from 34% in the initial estimate last Monday, as quoted by the CME FedWatch Tool. Another positive catalyst was the US House of Representatives finally passing a temporary spending bill that would avert a government shutdown, with broad support from lawmakers from both parties. A number of other economic data released weaker than expected also confirmed the condition of achieving a soft landing are as follows: Initial Jobless Claims released 231 thousand, where jobless claims in the last week were higher than the estimated 220 thousand jobless claims in the previous week. Meanwhile, the Philadelphia Manufacturing Index which measures business conditions in general in Philadelphia is still struggling in contraction territory although it has improved somewhat above the forecast. Both of the above data did more or less raise concerns of an economic slowdown situation, just at a time when the Fed is expected to keep interest rates high for some time. As if to agree with this thought, Industrial Production (Oct.) also extended its contraction and was the lowest negative growth in the last 4 months.
ASIAN MARKET: JAPAN released its initial estimate of 3Q23 GDP in disturbing numbers when economic growth fell into a recession of -2.1% yoy, deeper than the forecast of -0.6% and leaving the positive growth area of 4.5% in the previous quarter. Japan also continued deflation at the producer level (PPI) in October which was recorded at -0.4% mom. Machine Tool Orders from Japan were also recorded as dropping further to 20.6% yoy, dropping again from the previous period which was minus 11.2%. In neighboring countries, CHINA had more news in the Industrial Production (Oct.) and Retail Sales (Oct.) reports which strengthened more than expected. China also released New Loans data for October which turned out to be larger than expected at CNY 738.4 billion, but still did not change the position of Outstanding Loan Growth (Oct.) at 10.9% yoy. INDONESIA also received bullish sentiment from the release of a Trade Balance surplus in October worth USD 3.48 billion, larger than expected and the previous month, supported by better Exports & Imports, so that even though the growth was negative, the rate of decline had slowed down from the previous month.
EUROPEAN MARKETS: Still talking about Inflation, the UK reported CPI (Oct.) which also successfully cooled to 4.6% yoy, lower than the forecast of 4.8% and certainly from the previous month’s 6.7%. Following the data, their Input & Output PPI also fell from September. However, the sluggishness in Inflation came at the cost of a collapse in Retail Sales (Oct.) whose negative growth has been entrenched since May 2022 and this time it was the lowest drop in the last 3 months. In terms of employment, the UK released higher jobless claims data in October, coming out at 17,800 greater than the prediction of 15,000, and almost double from the previous month at 9,000. The aura of economic slowdown was even thicker in the EURO ZONE where they announced Industrial Production (Sept.) whose negative growth was even bigger than the previous month, so no wonder they wrote a preliminary estimate that 3Q23 GDP would be weaker than the previous quarter. However, on the one hand, the Eurozone should be happy that they have managed to get Inflation (Oct.) down to 2.9% yoy, lower than September’s 4.3%. Only Core CPI remains a work in progress as it read 4.2% yoy in October, still more than double the ECB’s 2% target.
COMMODITIES: Oil prices slid another 4% last week, the fourth consecutive week of declines as the issue of ballooning global inventories was not followed by sluggish demand, ahead of next week’s OPEC meeting. This somewhat contradicts OPEC’s latest monthly report on world oil supply & demand, where OPEC raised its forecast for world oil demand in 2023 to 2.46 million barrels per day, or bpd – up 20,000 from the previous forecast. In 2024, OPEC sees demand increasing by 2.25 million bpd, unchanged from last month. The question now is whether OPEC+ members Russia and Saudi Arabia will continue to cut production after December. The International Energy Agency (IEA) in its monthly report, followed OPEC’s lead by raising its 2023 production/consumption growth forecast to 2.4 million barrels per day, from 2.3 million bpd previously; and to 930 thousand barrels per day for 2024 from 880 thousand. The agency was cautious enough not to infer a drastic economic slowdown in some of the world’s major economies, but stated that their expectations are based on the hope of future interest rate cuts, when the current depressed Oil prices will be able to trigger more Crude Oil demand. In October, US Oil production stood at a record 13.2 million barrels/day, bringing total US Oil production to a record 421.9 million barrels. There was data confusion due to the system management upgrade whether that much Oil production could be absorbed by the market.
This week’s outlook:
In a short trading week due to the Thanksgiving Holiday next Thursday & Friday, investors will be looking for market direction by paying close attention to the Minutes of the last Federal Reserve Meeting of October 31 – November 1, which are due on Tuesday; to get an idea of the future of this upward trend in interest rates. Retail stocks are preparing for the holiday shopping wave known as Black Friday. Investors are monitoring whether the US consumer purchasing power still proves resilient. From Technology companies, Nvidia is the last megacap company to announce its earnings. Oil prices are expected to remain volatile. In terms of economic data, Existing Home Sales figures are expected out on Tuesday, followed by Initial Jobless Claims which is a day early due to holiday anticipation, and not forgetting Durable Goods Orders (Oct). In terms of market sentiment, investors have been more optimistic about the stock market in recent weeks, with stock prices rebounding from month-long declines from August to October. US Treasury yields, whose steady rise has been a negative sentiment for stock prices, have also retreated rapidly amid hopes that the Fed is nearing the end of its rate hike trend. No wonder last week, the DJIA, S&P500, and Nasdaq posted their third consecutive week of gains. For the DJIA and S&P500 this was the longest weekly gain since July, while for the Nasdaq it was the biggest gain since June.In a short trading week cut short by the Thanksgiving Day holiday next Thursday & Friday, investors will be looking for market direction by paying close attention to the Minutes of the last Federal Reserve Meeting of October 31 – November 1, which is due to be released on Tuesday; in search of an idea of the future of this upward trend in interest rates. Retail stocks are preparing for the holiday shopping wave known as Black Friday. Investors are monitoring whether the US consumer purchasing power still proves resilient. From Technology companies, Nvidia is the last megacap company to announce its earnings. Oil prices are expected to remain volatile. In terms of economic data, Existing Home Sales figures are expected out on Tuesday, followed by Initial Jobless Claims which is a day early due to holiday anticipation, and not to forget Durable Goods Orders (Oct). In terms of market sentiment, investors have been more optimistic about the stock market in recent weeks, with stock prices rebounding from month long declines from August to October. US Treasury yields, whose steady rise has been a negative sentiment for stock prices, have also retreated rapidly amid hopes that the Fed is nearing the end of its rate hike trend. No wonder last week, the DJIA, S&P500, and Nasdaq posted their third consecutive week of gains. For the DJIA and S&P500 this was the longest weekly gain since July, while for the Nasdaq it was the biggest gain since June.
Speaking of commodities, Crude Oil rebounded more than 4% last Friday from a 4-month low, as traders took cover shorts, coupled with US economic sanctions on some oil shipments from Russia. However, this could not save Brent & WTI prices from a more than 1% weekly decline due to surging US Oil inventories and record production levels. The unending property crisis in China and sluggish industrial growth there also made Crude Oil lose competitiveness. When Brent prices are below USD 80/barrel as they are now, many analysts expect OPEC+ to continue production cuts in 2024 as the decision of their meeting on November 26.
EUROZONE is scheduled to announce PMI data (Nov.) on Thursday, where economists do not expect any significant improvement in business activity. Furthermore, Consumer Confidence is on Wednesday and the most anticipated from Germany is the German Ifo Business Climate Index which is due on Friday. The European Central Bank (ECB) is set to publish its Financial Stability Review on Wednesday, followed a day later by the release of its October meeting minutes. ECB President Christine Lagarde will be in Berlin on Tuesday and will speak again at an event in Frankfurt on Friday, while several other ECB officials are also expected to comment during the week.
CHINA will again grab the attention of investors/traders as their central bank will announce interest rates this morning, which are expected to be unchanged from their current position: 4.2% for the long term (5 year), and 3.45% for the short term. Following on Thursday, the central bank will announce the BI7DRR benchmark interest rate which is also expected to remain unchanged from its current position of 6.0%. Japan will release its National CPI (Oct.) data on Friday, followed by Jibun Bank Japan Manufacturing & Services PMI preliminary estimates.
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