Markets Blog
David Matzko, LPL Research
Major U.S. indexes closed mixed this week as mixed Magnificent Seven earnings drove markets, while investors analyzed a full slate of macro data for insights into the Federal Reserve’s (Fed) rate cutting path. European markets also closed lower, as stock and bond markets reacted to the first Labour party budget in the U.K., while in Asia the Bank of Japan (BOJ) announced its latest rate decision as international markets broadly await next week’s U.S. election. Treasury yields continued to advance, while oil trimmed losses as geological tensions in the Middle East continued to fluctuate.
Index Performance
U.S. and International Equities
U.S. Equities: Despite a strong rally on Friday, stocks ended mostly lower to close an action-packed week for markets. Earnings season entered overdrive over the last five days with reports from 169 S&P 500 companies, including five Magnificent Seven (Mag Seven) names, while macro data captivated market attention with a week before the next Federal Open Market Committee (FOMC) rate decision. The S&P 500 closed the week 1.2% lower, as the Nasdaq Composite fell 1.5%, while the Dow ended little changed. Value outperformed growth, although both declined, while small caps were little changed.
After Tesla (TSLA) kicked off Mag Seven earnings with a bang last week, investors turned focus to fellow Mag Seven members Apple (AAPL), Amazon (AMZN), Meta Platforms (META), Microsoft (MSFT), and Google parent company Alphabet (GOOG/L) with hopes they could do the same. GOOG/L led off well, delivering an upbeat report with strong cloud results and positive artificial intelligence (AI) commentary from company leadership, sending shares higher. However, investor unease washed over stocks following reports from META and MSFT. Both tech giants topped earnings and revenue estimates, but shares slid following their Wednesday evening reports. META came under pressure due to continued scrutiny around AI spending and MSFT slipped after failing to meet cloud revenue growth estimates. To round out the week, AMZN rallied after delivering an earnings beat and an optimistic outlook, while AAPL shares dipped due to weak sales results in China.
On the macro front, markets analyzed a robust first look at third quarter economic growth and in-line personal income, spending, and price data for September — initially blurring the Federal Reserve’s (Fed) rate cut path. But weaker-than-expected October payrolls data (in the wake of the East Coast port strikes and severe hurricanes) provided clarity on Friday, bolstering rate cut bets and sending major indexes higher. Among other factors in play for equities this week, the rapidly approaching U.S. election continued to be flagged as an overhang on market sentiment.
International Equities: European stocks also closed lower on the week, as the STOXX 600 shed 1.5%. Amid a steady flow of corporate results, markets were also tasked with digesting the first budget from the Labour party and Chancellor Rachel Reeves in the United Kingdom. Highlights from the budget release included the largest tax increase for the U.K. since 1993 and increased government borrowing and spending, aimed at stimulating the economy. Markets dipped following the announcement, as investors began to analyze how the budget could impact inflation and the future for Bank of England (BoE) rate cuts. Elsewhere, Eurozone inflation data arrived slightly hotter than expected at 2.7% versus 2.6% expected on an annual basis. Although, separate reports indicated economic growth for the region expanded faster than expected, including France and Germany, which have been focal points due to economic weakness. Additionally, remarks from European Central Bank (ECB) officials suggested more modest rate cuts.
Asian markets ended broadly mixed on the week, capping mixed results for October. Japan outperformed the region after digesting the parliamentary election over the weekend. Stocks advanced around a decline in unemployment and the BOJ's decision to leave rates unchanged, rallying for most of the week despite mixed macro data, hawkish-leaning BOJ remarks, and yen strengthening. Major indexes in China closed the week in the red, lacking major catalysts ahead of the U.S. election and more stimulus measures expected to be announced next week. Taiwan and South Korea closed the week lower, as did Australia and New Zealand, while India delivered a modest weekly gain.
Fixed Income, Currency, and Commodity Markets
Fixed Income: The Bloomberg U.S. Aggregate Index ended the week lower after Treasury yields continued to march higher. The 10-year Treasury yield added 12 basis points to end near 4.36%, while the two-year yield gained six basis points. After the recent rise, yields appeared to stabilize early in the week ahead of key macro data as investors searched for clarity on the Fed’s rate-cutting path. However, the bond market looked past Friday’s noisy jobs report, and the Treasury yield curve steepened meaningfully with longer maturity Treasury yields selling off the most.
Late week bond selling (yields rising) was also likely a spillover from the U.K.’s plans for more borrowing and fiscal stimulus over the coming years, which is thought to be inflationary. Gilt yields rose after Wednesday’s budget proposal, which was reminiscent of the 2022 bond market response to the then Prime Minister Liz Truss’s “mini budget” that was anything but mini and caused Gilt yields to move meaningfully higher.
Finally, Wednesday morning’s Treasury Quarterly Refunding announcement was generally in line with expectations, with Treasury forecasted to continue to fund deficits primarily with short maturity T-Bills with little change to notes and bond issuance. Monday, Treasury announced borrowing needs that came in roughly $19 billion below previous estimates. Related, Tuesday’s month-end 7-year Treasury auction was amongst the best auctions since the COVID-19 pandemic with elevated demand. This was in stark contrast to the two auctions held on Monday, which were about as bad as it gets for Treasury auctions (very little demand with Treasury having to pay up to generate said demand). The International Monetary Fund (IMF) warned recently that public debt, globally, would likely eclipse $100 trillion this year with global debt levels expected to hit 120% of global GDP by 2050 (U.S. expected to hit 200% by 2050). Bond vigilantes have been lurking in recent years, so the risk remains that we could see pushback from higher debt levels in the U.S. markets like what has happened in the U.K., which would likely mean higher Treasury yields.
Commodities and Currencies: The Bloomberg Commodities Index traded over 2% lower this week. West Texas Intermediate (WTI) crude started the week sharply lower after Israeli strikes on Iran over the weekend were limited to military targets. However, crude trimmed weekly losses to end the week after reports of Iran potentially preparing for another attack in the coming days, but still closed the week 3% lower. Gold ended slightly lower after steep losses on Thursday as gold prices consolidated after another record high following strong core Personal Consumption Expenditures (PCE) data for September. Thursday’s drop was also credited to profit taking as the yellow metal secured another monthly gain. Silver traded nearly 4% lower while copper edged lower in a sideways trading range after strong manufacturing activity data in China. The U.S. dollar index ended little changed on the week, while the yen strengthened, although the Japanese currency remains under pressure from post-election political uncertainty.
Economic Weekly Roundup
Storms Distorted Data Collection. The storms across the southeast likely affected collection rates for the establishment survey, however, response rates for the household survey were within normal ranges. As LPL Research has highlighted, investors should expect choppy markets for a variety of reasons and data distortions add to the noise. Given the acute challenges in the establishment survey, investors should focus on the household survey this month. Here are a few highlights from that survey: The percent of long-term unemployed rose to 22% of total unemployed persons. Before the pandemic shutdowns, the percentage was 19.5%. Among the unemployed, the number of permanent job losers edged up to 1.8 million in October versus 1.2 million in February 2020. The October unemployment rate was unchanged at 4.1%. The employment to population ratio for prime age workers (25 – 54 years old) edged down to 80.6%, matching pre-covid rates.
Given the storm-related distortion, the Fed is in a tight spot as they adhere to data-dependency. Further complicating things for policy makers are the recent data revisions to income, spending, and savings rates. That said, the Fed will likely cut rates in the remaining two meetings as economic conditions weakened.
Health Care and Airfare Inflation Rose in September. Outsized gains in health care and airfare prices pushed services inflation up in September but still decelerated from a year ago. Prices on consumer goods fell 1.2% from a year ago, mostly driven by durable goods but also by a large decline in gas and other energy prices. Services prices eased but are still running hotter than pre-pandemic rates. Health care and airfare spiked in September. Prices for core services ex housing — the stickier components of inflation – decelerated in September and should keep the Fed on track for two cuts by the end of the year. In separate reports, initial jobless claims and continuing claims both declined after recent temporary surges from two storms.
The deceleration of inflation, including the stickier components, should keep the Fed on track for cutting rates in November and December. However, investors should brace themselves for a few head fakes as the path to 2% inflation will be long and difficult.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Factory Orders (Sep), Factory Orders ex Transportation (Sep), Durable Goods Orders (Sep final), Durable Goods Orders ex Transportation (Sep final), Capital Goods Orders Nondefense ex Aircraft (Sep final), Capital Goods Shipments Nondefense ex Aircraft (Sep final)
Tuesday: Election Day, Trade Balance (Sep), ISM Services Index (Oct), ISM Services Prices Paid (Oct), ISM Services Employment (Oct), ISM Services New Orders (Oct)
Wednesday: MBA Mortgage Applications (Nov 1) S&P Global U.S. Services PMI (Oct final), S&P Global U.S. Composite PMI (Oct final)
Thursday: Nonfarm Productivity (3Q preliminary), Unit Labor Costs (3Q preliminary), Initial Jobless Claims (Nov 2), Continuing Claims (Oct 26), Wholesale Trade Sales (Sep), Wholesale Inventories (Sep final), FOMC Rate Decision, Fed Interest on Reserve Balances Rate (Nov 8), Consumer Credit (Sep)
Friday: University of Michigan Sentiment Report (Nov preliminary)
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax.
Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: 652795
Comments