The Chair of the US Fed, Jerome Powell, announced the decision to leave interest rates unchanged in the most recent Federal Open Market Committee meeting. Powell’s remarks hinted that there might not be further rate increases this year, particularly given the cooling US economy. This led to a significant drop in US Treasury yields in overnight trading and a subsequent boost in technology stocks. While Powell did not rule out the possibility of future hikes, he emphasised that they would depend on the US economic trajectory.
Investors reacted to Powell’s comments shortly after weaker-than-expected manufacturing activity data was released, leading them to believe that a slowing US economy would discourage additional rate hikes. Powell’s tone was less hawkish than the markets had anticipated as he acknowledged that monetary conditions had tightened considerably in recent months.
While Powell did leave the door open to the possibility of one more rate hike, the market interpreted his statements as a sign that the Fed might have concluded its series of rate hikes and could even cut rates by mid-2024. Even if the Fed refrains from further hikes, it is expected that rates will remain above the 5% level until at least the end of 2024.
This scenario offers limited upside for Asian currencies, many of which have suffered losses this year due to the pressure of rising US rates.
Market focus now shifts to the upcoming non-farm payrolls data, set to be released later today. Any indications of a cooling labour market will likely reinforce the Fed’s decision to maintain interest rates at their current levels.
EQUITIES CLIMB ON UPBEAT SENTIMENT
US stock futures saw an extended uptick on Thursday, influenced by several factors. Initial jobless claims for the week exceeded expectations for the second consecutive time, while US labour costs unexpectedly decreased by 0.8% in the third quarter, in contrast with the anticipated 0.7% rise. These indicators suggest a gradual cooling of the US labour market. In response, the S&P 500 rose by 1.9%, the Dow Jones added approximately 565 points, and the Nasdaq 100 traded 1.8% higher. Earlier, stock futures were already on a positive trajectory as the Fed kept interest rates unchanged, as expected, and signaled a pause in rate hikes. The earnings season continued to play a role in market sentiment, with coffee retailer Starbucks gaining 9.5% after exceeding earnings and revenue expectations. Pharmaceutical company Eli Lilly also increased 4.7% following a Q3 report that surpassed expectations, although the company revised down its full-year profit guidance.
In the United Kingdom (UK), the FTSE 100 showed an upward trend, gaining 1.4% on Thursday. This was bolstered by positive corporate results and the Bank of England’s (BoE’s) decision to maintain its Bank Rate at a 15-year high of 5.25%, in line with expectations. Noteworthy stock movements included supermarket chain Sainsbury’s, whose shares were up 3.8% after the company projected its full-year profits to reach the upper end of previously provided guidance. International energy company Shell also saw its shares rise by more than 1.5% after the oil major reported profits in line with expectations and announced a $3.5 billion share buyback. Entain shares fell 5.9% as the gambling firm indicated that its margins were impacted by customer-friendly sports results. Consumer health company Haleon’s fell 3.3% due to reporting reduced sales of flu medicines and dietary supplements.
European equity markets enjoyed a positive streak on Thursday, marking their best performance since July. Real estate stocks were on track for their most significant rise in nine months, while tech shares were poised for their most substantial gain in three months. Investor sentiment was buoyed by the US Fed’s decision to keep interest rates unchanged, and Powell’s comments reinforcing the idea that US rates may have reached their peak. In the corporate sphere, German airline Lufthansa reported quarterly profits slightly above analysts’ consensus, and fashion and lifestyle company Hugo Boss’s third quarter sales and operating profit met market expectations. However, German fashion retailer Zalando anticipated a decline in sales for 2023. Frankfurt’s DAX 40 advanced by 1.6% to reach 15,160 points, and the pan-European STOXX 600 gained about 1.6% to reach 443 points.
In the Chinese markets, the Shanghai Composite experienced a 0.45% decline to close at 3,009, while the Shenzhen Component lost 0.94%, falling to 9,735 on Thursday. Mainland Chinese stocks faced challenges in gaining momentum and remained under pressure due to a surprising contraction in Chinese manufacturing activity, which has raised concerns about the country’s fragile economic recovery. Nevertheless, global sentiment remained positive, preventing Chinese stocks from suffering more significant losses. This was fueled by the US Fed’s decision to maintain interest rates for the second time and the US 10-year US Treasury yield falling to a two-week low.
GOLD AND OIL MARKETS: RECENT DEVELOPMENTS
West Texas Intermediate Crude futures rose above $81/barrel on Thursday, driven by a technical rebound. This was supported by the US Fed’s second consecutive decision to keep interest rates unchanged. Geopolitical tensions in the Middle East also contributed to the increase in oil prices. In contrast, US oil benchmarks hit a two-month low amid expectations that the Israel-Hamas conflict would be contained, easing concerns of it spreading through the oil-rich region. Weaker-than-expected manufacturing data from the US and China clouded the demand outlook.
Gold strengthened above $1,980/ounce, benefiting from a weaker dollar and softer global economic data, as central banks held rates steady.
Copper futures reached a one-month high above $3.65/pound, driven by strong demand forecasts and supply concerns, with China expanding its budget for manufacturing investments. Data showed a significant drop in copper stocks at the Shanghai Futures Exchange and the London Metal Exchange, which plummeted nearly 40% in a week, erasing earlier gains. Operational issues in South American mines prompted companies like Southern Copper, Teck, and Anglo American to revise down their copper production forecasts for the current year.
US DOLLAR RETREATS
On Thursday, the US Dollar Index dipped below 106, marking a significant retreat from its recent one-month highs. This drop correlated with a decline in US Treasury yields, with the 10-year US yield falling to a more than two-week low of below 4.7%. The Fed’s decision to maintain interest rates contributed to these shifts. The Fed also acknowledged that the recent surge in yields had tightened financial conditions and hinted at the conclusion of rate hikes. Moreover, the latest data indicated a cooling labour market, with weekly claims exceeding expectations for the second consecutive week, along with unexpected third quarter labour cost reductions.
During the first two days of November, the euro was trading around $1.06/€, as traders assessed the global economic and monetary policy landscape, including the Fed’s decision main interest rates steady in its November meeting. In Europe, the European Central Bank (ECB) maintained interest rates at their current level for the first time in more than a year in October, as predicted. The ECB reiterated its intention to keep borrowing costs at a restrictive level for an extended period. Despite this, inflation in the eurozone fell below expectations, reaching 2.9% last month, nearing the ECB’s 2% target. However, signs indicate that the ECB’s tightening measures are negatively impacting the European economy.
In the same period, the pound made slight gains, reaching $1.22/£, as traders digested the BoE’s recent monetary policy decision. The central bank maintained interest rates at their current levels for a second meeting in November, in line with expectations. The BoE reinforced its commitment to keeping interest rates high for an extended period and left the door open for another rate hike if evidence of persistent inflationary pressures emerged. BoE Governor Andrew Bailey emphasised that it was premature to consider rate cuts. Nonetheless, the UK’s economic outlook remains challenging, with inflation remaining high at 6.7% in September, and significantly above the Central Bank’s 2% target. The BoE’s projections indicate economic stagnation in the third quarter of 2023 and minimal growth of just 0.1% in the fourth quarter is expected, with a forecast of zero growth in 2024 and a modest 0.25% expansion in 2025.
The pound started the day trading at 1.2197/$ and 1.1478/€.
Sources: Trading economics, Investing.com, Refinitiv and the MTBPS address.
Written by Citadel Global Director, Bianca Botes
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