Bassanese Bites: No hurry – October 8 2024
Global markets
Global equities eased back over the past week, reflecting a rise in Middle East tensions and stronger-than-expected US economic data – which, in the latter case, has scaled back near-term US rate-cut expectations.
Developments over the past week have tended to be bearish for bond markets – at least over the short term – which in turn has dented equity market enthusiasm.
For starters, the escalation of the military conflict in the Middle East (Israel’s moves into Lebanon and Iran’s missile attack on Israel) lifted the oil price further, raising the spectre of at least a short-run rebound in inflation.
Secondly, more cautious Fed rhetoric and solid US economic data – especially last Friday’s blockbuster payrolls report – has understandably scaled back hopes for back-to-back 0.5% rate cuts from the US Federal Reserve. Recent comments from Fed chair Powell, for example, indicated the Fed is in “no hurry” to cut rates quickly. Then on Friday, September jobs growth was +254k – well above market expectations of +150K – with the unemployment rate ticking back down to 4.1% (and almost 4.0%). Wage growth was also firm.
Against this backdrop, markets have scaled back hopes for a 0.5% cut at the November Fed meeting, with now an 85% chance of a 0.25% cut and 15% chance of no cut all.
One might question why the Fed is considering another cut at all! One complication is that US economic data remains somewhat mixed: while payrolls continue to boom, a range of other employment indicators (manufacturing and non-manufacturing employment indices, household employment perceptions, small business sentiment) are less robust. Provided the inflation story remains benign, the Fed is likely to keep taking out insurance against a deeper-than-desired economic downturn.
Global week ahead
A major focus this week will be the scale of any retaliation Israel inflicts on Iran in response to last week’s missile attack. Talk is swirling of a possible strike on oil – and possibly even nuclear – capabilities. The stronger the response, the greater the likely upside move in oil prices and perhaps bond yields – and downside in equity markets.
