Muzinich Weekly Market Comment: Mixed bag
Insight
October 7, 2024
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In our latest roundup of the key developments in financial markets and economies, we assess an underwhelming start to Q4 for risk assets, despite supportive economic data.
Welcome to the fourth quarter, traditionally the strongest period for equities and high-yield corporate credit. The Bloomberg World Equity Index has closed in positive territory in eight of the last ten fourth quarters. High-yield markets have been more mixed, with positive returns in only five of the last ten years, although four of these were in the last five.[1]
This quarter, however, has started off in somewhat messy fashion. Equities are generally soft, except for China, with the Hang Seng index up 33% year-to-date – fuelled by an unexpectedly large set of stimulus measures, as we noted in our last Weekly Comment.
Industrial commodities have also enjoyed a recent bounce, buoyed by optimism of increased demand from China, with iron ore leading the pack last week, up 6%.[2]
Oil prices, on the other hand, remain volatile due to geopolitical tensions. Prices fell after the Saudi oil minister warned that crude could drop to as low as $50 per barrel if OPEC+ members do not adhere to production agreements.[3] However, prices rebounded after US President Joe Biden said Iranian oil facilities could be targeted by Israel.[4] Analysts estimate that if 1 million barrels per day of Iranian oil production is disrupted, prices could increase by $20 per barrel.[5] Oil ended the week up 9%.[6]
Bank of Japan learns PR lesson
After coming under heavy criticism following an unexpected rate hike at the end of July, which triggered a brief, but significant, bout of market volatility,[7] the Bank of Japan (BoJ) seems to have got the memo that markets do not like surprises.
The minutes from the BoJ’s monetary policy meeting in September emphasised the importance of improving communication: "When conducting further policy interest rate hikes, the bank will need to communicate its policy stance and other factors to markets more carefully."[8]
This was followed by a series of assertive statements from government officials, including Japan's new Prime Minister, Shigeru Ishiba, who said: "I don’t think the environment is ready for an additional rate hike."[9]
Elsewhere, Bank of England Governor Andrew Bailey commented in an interview with The Guardian that the central bank’s monetary policy committee could adopt a "more aggressive" approach to rate cuts if inflation data continues to improve.[10]
Meanwhile, European Central Bank (ECB) President Christine Lagarde, speaking at the European Parliament, indicated policymakers are becoming more confident in their ability to control inflation, suggesting a 25 basis points cut is likely to be announced at the ECB’s October meeting.[11]
In the US, Federal Reserve Chair Jerome Powell noted that while the Fed would continue to lower rates to support economic growth, there was no immediate need for further aggressive cuts.[12]
Dollar strengthens again peers
The cumulative effect of these announcements was a strong week for the US dollar, which appreciated 4% against the Japanese yen, 2% against the British pound and 1.5% against the euro.
In emerging markets, the standout performer was the Mexican peso, which gained over 2% against the dollar. In her inauguration speech on October 1, the country’s new President, Claudia Sheinbaum, announced her intention to maintain fiscal discipline, ensure the central bank's autonomy and promote corporate nearshoring. Additionally, Mexico's Supreme Court has agreed to review the judicial reforms passed by Congress in September.[13]
If there was a consistent theme last week, it could be found in economic data. Activity data was supportive of growth, while price data pointed toward disinflation – at least in developed markets. Purchasing Managers' Indexes (PMIs) either met or exceeded expectations. China’s composite PMI, for example, improved to 50.4 from 50.1, driven by a slower-than-anticipated contraction in manufacturing.[14] The Eurozone's composite PMI came in at 49.8, well above the expected 48.6, with robust services and strong activity from Spain contributing to the upside surprise.[15]
US services PMI saw its fastest expansion since February 2023, with new orders growing more than expected, pushing the index to 54.9, above the consensus of 51.7.[16] However, the biggest surprise came from the monthly jobs report, which was strong across the board. Unemployment fell to 4.1% and nonfarm payrolls rose by 254,000 in September, well above the consensus forecast of 150,000.[17]
On the price front, Swiss inflation slowed to its weakest pace in over three years, with consumer prices rising just 0.8% year-on-year.[18] Meanwhile, Eurozone inflation fell to 1.8% in September, in line with expectations and below the ECB’s 2% target.[19]
As a result of these developments, government bond markets saw a bear flattening, with 2-year yields rising more sharply than 10-year yields. While inflation fears have eased, there are concerns that the normalisation of monetary policy will be slower than expected. The US overnight interest rate swap market has now aligned with the Fed’s median projection of two 25 basis points rate cuts this year.
This environment benefited high-yield credit, which outperformed investment grade last week, with emerging market high yield again the standout sub-asset class.
Questions, questions
With the first week of the fourth quarter behind us, investors are focusing on several key economic questions: Is the softening of financial conditions starting to take effect? Our preferred financial conditions index has loosened to levels not seen in over two years (see Chart of the week).
Has inflation bottomed out? Winter utility subsidies are being removed, base effects have played out and China’s exporting of goods deflation appears to be over. Notably, European Union member states on October 4 voted to apply a 45% import tariff on Chinese autos.[20] And finally, some emerging-market countries, a good lead indicator, are experiencing inflationary pressures again.
Chart of the week: US policy at loosest levels for 2 years
Source: Goldman Sachs, US Financial Conditions Index, as of October 4, 2024. For illustrative purposes only.
Past performance is not a reliable indicator of current or future results.
References
[1] Ice BofA Platform, as of October 4, 2024
[2] CME Group, as of October 4, 2024
[3] The Wall Street Journal, ‘Saudi Minister Warns of $50 Oil as OPEC+ Members Flout Production Curbs,’ October 2, 2024
[4] BBC, ‘Biden says US discussing possible Israeli strikes on Iran oil facilities,’ October 3, 2024
[5] CNBC, ‘Goldman Sachs says crude could spike by $20 on Iran oil shock,’ October 4, 2024
[6] Oilprice.com, as of October 4, 2024
[7] Muzinich & Co., ‘Weekly Market Comment: The great carry unwind,’ August 12, 2024
[8] Bloomberg, ‘BOJ keen to avoid surprises after rate hike tanked Nikkei, meeting notes show,’ October 1, 2024
[9] Bloomberg, ‘Japan's Ishiba Rules Out BOJ Interest Rate Hikes for Now,’ October 2, 2024
[10] The Guardian, ‘Bank of England governor warns of Middle East oil shock risk,’ October 3, 2024
[11] European Central Bank, ‘Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,’ September 30, 2024
[12] Federal Reserve, ‘Economic outlook speech at the National Association for Business Economics Annual Meeting, Nashville, Tennessee,’ September 30, 2024
[13] Mexico News Daily, ‘Sheinbaum says she ‘will govern for everyone’ in her first speech as president of Mexico,’ October 1, 2024
[14] National Bureau of Statistics of China, Comprehensive PMI Output Index, October 1, 2024
[15] S&P Global, HCOB Eurozone Composite PMI – September 2024, October 3, 2024
[16] S&P Global, US Services PMI, October 3, 2024
[17] US Bureau of Labor Statistics, ‘Employment Situation Summary,’ October 4, 2024
[18] Federal Statistical Office, Swiss Consumer Price Index – September, October 3, 2024
[19] Eurostat, as of October 1, 2024
[20] European Commission, ‘Commission proposal to impose tariffs on imports of battery electric vehicles from China obtains necessary support from EU Member States,’ October 4, 2024
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of October 07, 2024, and may change without notice. All data figures are from Bloomberg, as of October 04, 2024, unless otherwise stated.
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