Nick Spencer-Skeen, Senior Executive Officer, Lunaro Markets Limited
- S&P 500 7,723 (+0.73%)
- Nasdaq 27,191 (+1.19%)
- Gold $4,140 (-0.88%)
- Brent Crude Oil $102.67 (+0.49%)
Markets spent last week digesting a renewed hawkish shift from global central banks against a mixed US data backdrop. Federal Reserve (Fed) officials indicated that inflation remains above their stated objectives and discussed the possibility that additional policy tightening may be required depending on future economic developments.
On the data front, strong August consumption and firm core Personal Consumption Expenditures (PCE) inflation initially supported that message, before a softer September payrolls report on Friday briefly pulled front-end Treasury yields lower.
The tightening impulse wasn’t just focused on the US, but rather was global. The Reserve Bank of Australia (RBA) raised rates to 4.60%, while hawkish commentary from the Bank of England (BoE) added to pressure across developed-market bonds. European equities struggled as higher yields weighed on valuations, with the Stoxx 600 down 1.1% and FTSE 100 falling 2.1%.
Asian equity markets recorded comparatively stronger performance during the week, coinciding with fresh Chinese policy-support announcements. The Nikkei gaining 3.7%. Elsewhere, the US dollar strengthened, acting to pull EUR/USD down to fresh 52-week lows. Crude oil prices declined as hopes grew around a potential easing of disruption through Hormuz.
Jobs Data Softens the Edge
Friday’s September payrolls report meant traders ended the week with plenty to think about over the weekend. The initial reaction was one of “dad news is good news”. The data prints missed on every major metric and missed all estimates. Plus, August was revised down to +133,000 (from a prior +162,000), and July was revised to a net loss of 10,000 jobs, the first negative monthly print in some time.
Following the release, markets experienced movements that included higher equity prices, lower US dollar levels, stronger Treasury prices and a reduction in market-implied expectations for near-term policy tightening. However, that move faded through the session.
The report therefore softened, rather than overturned, the week’s broader hawkish Fed repricing. After the initial knee-jerk move, it became apparent that traders were reluctant to treat one weaker payrolls print as sufficient to materially change the policy path, particularly after firm consumer-spending data and repeated warnings from Fed officials that further tightening may still be required. Market participants interpreted the data as indicating some moderation in labour-market momentum, although opinions remained divided regarding its broader economic significance.
Minutes Due From a Hawkish Fed
Wednesday’s FOMC minutes will offer a deeper look at the debate behind the Fed’s September decision to raise rates 25bps in its first hike since 2023. The decision itself was unanimous, but markets will focus on how broadly policymakers supported further tightening and what conditions they believe would justify another move.
Market participants may focus on any discussion relating to persistent inflation and policymakers’ assessment of future economic conditions. Alongside this, any comments around resilient domestic demand and thoughts around how tighter financial conditions could impact the economy will also be noted.
The minutes arrive at an interesting time, given we’ve had another week of hawkish Fed commentary, as well as the latest mixed bag of data. The meeting happened before the major data releases and will primarily reflect the information available to policymakers at that time. Market participants may therefore focus on any discussion regarding the factors that contributed to September’s rate increase and policymakers’ assessment of the economic outlook.
Any indications regarding policymakers’ future policy preferences may influence market expectations and could contribute to movements across interest-rate and currency markets.
Keep an Eye on Yields
In previous market commentaries, we noted that changes in global bond yields have been closely monitored by market participants as one indicator of broader financial-market sentiment. This relationship remained evident during the past week.
Last week saw yields continue to push higher, extending a selloff that has taken borrowing costs across several major markets to multi-decade highs. The US 10Y Treasury yield briefly reached 5.34%, its highest since 2002, while long-end yields in Europe and Japan also remained under pressure.
Market participants will continue to monitor yield movements alongside developments relating to inflation, energy markets and fiscal policy. Historically, changes in benchmark yields have been one factor considered by market participants when assessing equity valuations. Changes in yields may also influence how market participants assess non-yielding assets such as gold.
