“The US economy is basically fine,” said Jerome Powell, chairman of the United States (US) Federal Reserve (Fed).
It may surprise you to know that since the start of July 2024, the US Treasury Index has outperformed the S&P 500 Index – Treasuries returned roughly 5.0% compared to the SPX’s 3.2% (including dividends) over the 81-day period. The rally in the Treasury market concludes an almost two-year retreat in US bond prices with the Treasury Index retracing back to levels last seen in March 2022 when the first post-pandemic rate hike was announced.
In June this year, US two-year Treasuries traded at a 4.75% yield and have since fallen to 3.59%, meaning that the cost of borrowing has decreased, or rather monetary conditions are loosening. The loosening comes amid signs of a US economic slowdown, which the bond market thinks will trigger an aggressive rate-cutting cycle by the US Fed.
However, the bond market might be ahead of its skis, given that the economic slowdown is not severe. In fact, the US economy appears to be solid amid resilient consumer spending, decent company-earnings expectations, and unemployment levels still at bay.
This is perhaps why the US Fed Chairman, Jerome Powell, had to pick his words carefully on Wednesday afternoon when announcing a 0.50% cut in interest rates. According to his statement, the Federal Open Market Committee’s (FOMC’s) premise for cutting rates was underpinned by progress on inflation, and the acknowledgment of sturdy economic growth. Reading between the lines, the FOMC is seen to be protecting the labour market from further cooling. This could go some way to assuaging bond market fears.
‘There is nothing in our projections that suggests we are in a rush’, noted Powell.
According to the FOMC’s so-called dot plot, the members expect to cut rates by another 0.50% by the end of the year, but their 2024 GDP growth forecast is unchanged at 2.0%. If US economic strength endures, then an aggressive rate-cutting cycle could be seen as inflationary. Alternatively, a shallower rate-cutting cycle could allow the Fed to support the economy while maintaining price stability.
DATA IN A NUTSHELL
US retail sales edged up by 0.1% in August, beating market expectations of a 0.2% decline. This follows a strong upward revision of 1.1% in July, suggesting consumers are maintaining spending momentum despite inflationary concerns. Retail sales, excluding autos, also grew by 0.1%, below July’s 0.4% rise but still a positive sign for underlying demand. Industrial production bounced back sharply with a 0.8% increase, a robust recovery from July’s 0.9% drop, fuelled by improved manufacturing output.
In August, EU car registrations fell sharply by 18.3%, marking the fourth consecutive month of declines. Germany, France and Italy posted steep losses, 27.8%, 24.3% and 13.4%, respectively, while Spain saw a smaller drop of 6.5%. The electric vehicle market was hit hard, with battery-electric vehicle (BEV) registrations plunging 43.9% year-on-year. Germany and France experienced the most significant contractions in BEV demand, falling by 68.8% and 33.1%, respectively. It was reported this week that Norway now has more electric cars on its roads than petrol vehicles, a green shift funded largely by its oil wealth.
The ZEW Economic Sentiment Index for Germany fell drastically to 3.6 in September from 19.2 in August. This marks its lowest reading in 11 months, underscoring rising concerns over inflation, stagnant growth, and geopolitical instability. The pessimism reflects broader challenges facing the German economy, including higher energy costs and declining industrial activity, which are weighing heavily on future outlooks.
Equities
Global equity markets rallied over the past week, with the Bloomberg Magnificent 7 Total Index leading the charge, gaining 3.18%. The S&P 500 Index climbed 1.70% on Thursday having reached an all-time high of 5,733.57 points during the session. Over the week, global energy technology company Enphase Energy Inc and building materials manufacturer Builders FirstSource Inc topped the list of gainers, surging 11% and 14.80%, respectively. The index’s upward momentum was tempered by losses in consumer staples and technology.
European markets also saw positive movement, with the EURO STOXX 50 rising 2.05% this week. Chemical company BASF SE led the pack with a 7.3% increase following news that it would be restructuring its agri chemicals business, while telecommunications company Deutsche Telekom fell 2.7%.
In corporate news, drinks company Davide Campari-Milano had a challenging week following the abrupt departure of CEO Matteo Fantacchiotti after less than a year in the role. The company’s shares dropped 6% on Wednesday. A day before his resignation, Campari announced the acquisition of a 14.6% stake in Capevin, owner of whisky maker CVH Spirits. Capevin was unbundled from Distell in 2023 as part of the Heineken/Distell transaction.
Commodities
Gold prices surged on Thursday and touched an all-time high of $2,600/ounce as expectations of potential Fed interest rate cuts boosted the precious metal’s appeal. Monetary easing typically supports non-yielding assets like gold.
Copper futures for December delivery saw a significant uptick, rising 3.47% to $4.30/pound. Bank of America analysts remain bullish on copper, forecasting prices to exceed $10,000/tonne by 2025. This optimistic outlook is driven by strong structural demand, constrained supply, and increased investment in energy transition projects. The analysts expect copper prices to stay elevated even with potential Fed rate cuts, citing high demand and tight mine-supply conditions.
Iron ore futures gained ground, with the benchmark October contract on the Singapore Exchange rising 2.46% to $92.95/tonne. The surge was fuelled by prospects of fresh Chinese monetary stimulus and lower inventories, which overshadowed worries about weakening domestic demand in the world’s top iron-ore consumer. China will announce its main policy and benchmark lending rates on Friday; economists are expecting rates to be maintained at 3.85% for the five-year Loan Prime Rate and 3.35% for the one-year rate.
Oil prices climbed this week, with future prices of Brent and West Texas Intermediate rising to $74.81/barrel and $72.15/barrel, respectively. US oil market data showed mixed signals: active rigs increased slightly, and inventories fluctuated unexpectedly. Iraq’s adherence to the Organization of Petroleum Exporting Countries (OPEC+) quotas supports prices, but concerns about weakening Chinese demand are still a dominant factor in pricing.
Currencies
The US dollar weakened slightly following the Fed’s decision to cut interest rates to 5.00%. The US Dollar Index fell 0.69% to 100.66 as markets assessed the potential long-term impact of the rate cut on the US economy. Traders remain cautious ahead of upcoming unemployment claims data and the Philly Fed Manufacturing Index, both expected to provide further insight into the US’s economic outlook.
The euro strengthened, rising by 0.80% to $1.1163/€. Narrowing yield spreads between the eurozone and the US supported gains, as investors positioned for a retest of the upper $1.11/€ levels. However, concerns linger about a possible mild recession in Germany, as hinted by recent economic data. The shrinking eurozone current account surplus also added pressure, with July’s surplus falling to €39.6 billion from €50.5 billion the previous month.
Sterling fluctuated but regained ground, rising 0.2% to $1.265/£ after briefly dipping below $1.26/£, its lowest level in over a month. Uncertainty around the Bank of England’s monetary policy is keeping the currency volatile, though steady UK employment figures and softer inflation are offering temporary relief to markets.
Key Indicators:
GBP/USD: 1.3283
GBP/EUR: 1.1717
GOLD: $2,610
BRENT CRUDE: $74.58
Sources: Bloomberg, Trading Economics, Financial Times, Wall Street Journal and CNBC.
Written by Citadel Advisory Partner and Senior Equity Analyst, Thambo Mthwalo.
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