Oil soars 10% and China's stimulus flops

Welcome back to SovereignBeat!

• US inflation overshoots to the upside

• 50bps cut fully ruled out for November meeting

• China’s tepid stimulus leaves markets rattled

• Japan equities gain as Chinese lose

• Oil rally rolls on as markets brace for Israel's next move

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: In September, the Consumer Price Index (CPI) increased slightly more than anticipated, raising questions about the potential pace of upcoming interest rate cuts. In September, the Consumer Price Index (CPI) rose 0.2%, translating to a 2.4% annual rate—slightly lower than August's 2.5% but still above the 2.3% forecast by economists. Core CPI, which excludes energy and food, advanced 0.31%, marking its highest monthly gain since November and pushing the annual core inflation rate to 3.3%, up from 3.2% in the previous month.

• However, there were notable monthly increases in medical care services (0.7%), airline fares (3.2%), and motor vehicle insurance (1.2%). These spikes are unlikely to be mirrored in the Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge, which calculates these categories differently. Energy prices declined by 1.9% month-on-month, which explains the substantial difference between the headline and core inflation readings.

• On Thursday, the Department of Labor also revealed an unexpected rise in weekly jobless claims to 258,000, the highest in 14 months. Continuing claims surged to 1.86 million, the highest since late July.

• In response to the inflation and labor data, long-term bond yields spiked, with the 10-year U.S. Treasury yield hitting 4.12% intraday on Thursday—the highest since July 31—and closing at 4.08% on Friday, up from 3.98% the previous week. The data also shifted market expectations for the Federal Reserve's next meeting on November 7th. Futures markets now estimate a 10.5% chance of the Fed holding rates steady, while an 89.5% probability remains for a 25 basis-point cut, ruling out the once-anticipated 50bps cut.

• Additionally, the September Fed FOMC minutes were released last week, showing that there was a heated debate over the half-point rate cut as some officials argued for a quarter-point reduction. In the end, only Michelle Bowman opposed the half-point cut, the first Federal Reserve governor to dissent from an interest-rate decision since 2005.

• EU: Minutes from the ECB Governing Council’s September meeting, released last week, reaffirmed the expectation that inflation will ease toward the 2% target by year-end. The central bank indicated that a gradual reduction in borrowing costs could be appropriate if inflation data aligns with its projections, but emphasized it would not commit to a fixed rate path. However, recent remarks from ECB officials seemed to support the market's belief that policy easing might accelerate as inflation cools and economic conditions deteriorate.

• China: Finance Minister Lan Foan announced at a news conference that the government would implement more "counter-cyclical measures" this year. Here are main takeaways from new commitments:

• Increased Borrowing: China plans to borrow more to assist local governments with their "hidden debt," easing financial pressures and allowing them to focus on economic support.

• Subsidized Housing: Local governments can use funds from special bonds to purchase unsold homes for subsidized housing, although previous reluctance due to financial issues persists.

• Debt Capacity: Officials noted substantial room for the central government to raise debt and increase the fiscal deficit, with more details expected at the upcoming legislative meeting.

  Bank Capital Support: Major state banks will receive support to replenish their capital base, addressing pressures from recent mortgage rate cuts and policy rate reductions.

• No New Consumption Stimulus: There are no new incentives for consumption or subsidies for households. The 2.3 trillion yuan in special bond funds available this year are not considered new stimulus as they include previously issued but unused bonds.

• Overall, markets expected much more as the officials failed to provide specifics regarding the size of the fiscal stimulus. The actual guidance from the government suggested only a vague commitment, primarily aimed at preventing further deleveraging in the housing market rather than a broader economic boost.

Equity Markets

• US: The S&P 500, Dow, and NASDAQ all gained over 1.3%, marking their fifth consecutive week of growth. The S&P 500 and Dow reached new record highs, while the NASDAQ closed less than 2% below its all-time peak. Strong performance in NVIDIA shares boosted growth stocks, which outpaced value stocks.

• China: After the markets reopened on Tuesday following a weeklong holiday, Chinese equities declined during a week as optimism surrounding Beijing’s stimulus measures faded. The Shanghai Composite Index dropped 3.56%, while the blue-chip CSI 300 fell 3.25%. In Hong Kong, the Hang Seng Index saw a significant decline of 6.53%, according to FactSet. On Saturday, when Finance Minister Lan Foan announced vague and rather feeble fiscal stimulus measures, the markets were closed, even though it was a working day. Expect further declines in equity indexes when the markets open on Monday.

• Japan: Japan’s stock markets climbed over the week, with the Nikkei 225 rising 0.93%. A weaker yen supported the outlook for exporters, with the currency trading around 149 against the U.S. dollar—near its lowest level since August. The yen faced pressure after Japan’s new prime minister, Shigeru Ishiba, signaled that conditions are not favorable for an interest rate hike.

Commodity Markets

• Oil: The global benchmark Brent crude oil prices rose over 1% this week. Since Iran launched ballistic missiles at Israel last week, oil prices have increased by more than 10% as of Friday's close. However, the rally has moderated due to uncertainty surrounding Israel's potential response. Both Goldman Sachs Group Inc. and hedge fund manager Pierre Andurand have forecasted a potential spike in oil prices of up to $20 per barrel if Israel targets Iranian export facilities.

In Motion

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