Markets embraced Trump

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• Higher inflation and almost no jobs added to the US economy in October

• 25 bps rate cut fully priced in for next week after the US election.

• EU growth doubles in Q3; Germany avoids recession.

• UK budget sends gilt yields soaring.

• Equity markets and oil both in the red this week.

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• USA: Last week was packed with the economic data, with GDP, the PCE inflation index, nonfarm payroll numbers, and unemployment figures released one after another. On Wednesday, the Bureau of Economic Analysis released an advance estimate for third-quarter GDP, showing the economy largely held its momentum despite high interest rates and ongoing inflation concerns. The third-quarter annual GDP growth came in at 2.8%, slightly below the 3.0% seen in the second quarter but still significantly above the 1.6% growth rate in the first quarter.

• On Thursday, the BEA released the personal consumption expenditures price index, which showed a seasonally adjusted increase of 0.2% for the month, with the annual inflation rate at 2.1%. This marks the lowest level since early 2021 and is just above the Federal Reserve’s 2% target. However, the core inflation rate, which excludes the more volatile food and energy categories, stood at 2.7% after a monthly increase of 0.3%, the largest since April. This reinforces the case for a more gradual approach to interest rate cuts following last month's significant reduction, especially after taken into considerations the latest payroll data.

• On Friday, the Labor Department reported that nonfarm payrolls were “essentially unchanged” for the month of October, with employers adding just 12,000 jobs—the smallest gain since December 2020. The figure came in well below the Dow Jones estimate of 100,000, primarily due to a 44,000-job decline in transport equipment manufacturing caused by the Boeing strike. Limited growth in other major sectors was insufficient to offset this drop. The report also highlighted the impact of hurricanes Helene and Milton but noted that “it is not possible to quantify the net effect” of these storms on the overall job count. Meanwhile, the unemployment rate remained steady at 4.1%.

• Yields on U.S. government bonds climbed for the sixth time in seven weeks, as the countdown to the November 5th election continues and betting markets edge toward a Trump victory, though the pace of yield increases has slowed. The 10-year Treasury yield ended Friday at 4.39%, up from 4.24% the previous week and significantly higher than its recent low of 3.62% on September 16.The U.S. Dollar Index (DXY) rose to 104.3 on Friday, reflecting a 2.6% increase for October and marking its largest monthly gain in more than two years.

• The implied probability of a 25 basis point rate cut on November 7th is at 98.9%. Despite lower nonfarm payroll and manufacturing reports, this probability has barely changed over the last week ahead of the FOMC meeting. Traders are increasingly betting on a potential Trump victory, which suggests higher inflation and fewer Fed cuts. This sentiment is also reflected in the lack of pricing for a higher 50 basis point cut in the upcoming meeting.

• EU: The eurozone economy grew by 0.4% in the third quarter, doubling its growth rate from the second quarter and surpassing the consensus estimate of 0.2%. Germany unexpectedly averted a recession with a growth rate of 0.2%, while France and Spain reported stronger-than-anticipated economic growth.

• On the inflation front, Eurostate reported that the annual headline inflation rose to 2% in October, up from 1.7% in September, driven by the fading impact of last year's declining energy prices. Services inflation remained steady at 3.9%, and the core inflation rate—excluding energy, food, alcohol, and tobacco—held steady at 2.7%. The ECB cut its key interest rate by 25 basis points to 3.25% this month - its third cut this year.

• UK: In her first budget as Chancellor of the Exchequer under a Labour government in 14 years, Rachel Reeves announced an additional GBP 70 billion in spending over the next five years, which will be financed through tax increases totaling GBP 40 billion and additional borrowing of GBP 32 billion. She also indicated a loosening of fiscal rules to accommodate higher-than-anticipated borrowing.

• The yield on 10-year government gilts rose from 4.28% to 4.46% wow by the end of trading on Friday, having peaked earlier above 4.50%. This increase coincides with an ongoing debate about whether the budget will lead to higher growth, as some analysts worry that increased taxes may negatively impact business sentiment. The Office for Budget Responsibility expressed concerns, stating that increased taxes could hinder long-term economic growth, projecting the economy will grow by just over 1% this year and 2% next year.

• In an effort to reassure anxious investors following a sell-off in the bond market, Reeves emphasized that the Labour government’s "number one commitment" is to ensure "economic and fiscal stability," asserting that public finances are now on a stable trajectory. However, questions remain about whether the anticipated growth will materialize in the coming years or the labour government will need to raise taxes again in a few years to live up to their committments. From a FX perspective, the pound is becoming more attractive, offering comparable yields to the US dollar and better growth prospects than eurozone.

Equity Markets

• US: Despite a rebound on Friday, the major indexes ended the week in the red, with the S&P 500 and NASDAQ declining approximately 2% each, while the Dow fell by a smaller margin of 0.5%. The S&P 500 experienced a 1.0% drop in October, snapping a streak of five consecutive monthly gains, and marking only its second negative result in the past year compared to ten positive months. Similarly, both the NASDAQ and Dow recorded losses in October, falling by 0.5% and 1.3%, respectively.

• Earnings reports from leading technology firms continued to show positive momentum during one of the busiest earnings seasons. As of Friday, analysts estimated an average earnings increase of 5.1% for all S&P 500 companies in the third quarter, based on already reported results and pending forecasts.

Commodity Markets

• Oil: Last week, oil markets faced sharp price fluctuations driven by geopolitical tensions and demand concerns. Crude prices dropped midweek due to worries over global demand as record US crude production continued to weigh on prices ahead of the upcoming US elections and the Federal Reserve's meeting. However, prices rebounded as risk premiums surged amid reports of Iran preparing a retaliatory strike on Israel from Iraq. Despite this, it wasn’t enough to push prices into positive territory, with Brent crude declining to $72.90 per barrel, down 3.5% week on week. Prices continue being pressured by the ongoing weakness in Chinese demand.

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