As we noted on Friday, the credit markets were on fire all week. This increase was driven by the release of US inflation data, capping weeks of uncertainty stemming from the government shutdown. Sentiment across major indices was lifted on the news as investors cheered the softer-than-expected Consumer Price Index (CPI) figures. The S&P 500 reached a new all time high. This spike occurred during time as markets were becoming more optimistic about the progress of the US-China trade negotiations and speculation of Federal Reserve interest rate cuts.
Intel’s stock surged by as much as 8% in pre-market trading after the tech giant announced results that exceeded analysts’ forecasts. Investor excitement turned to disappointment almost instantly. Now they are starting to wonder if Intel’s resurgence is the result of policy driven industrial strategy or if it really does represent a long-term turnaround after a history of failure.
On the international front, negotiations between the US and China over a trade agreement continue to progress. Both countries have reportedly come to a “tentative agreement” on key sticking points. These measures range from export controls and shipment levies to more generalized responses to fentanyl-related concerns. This welcome turn of events has created a fresh wave of excitement in the markets. As a result, it has disproportionately affected the performance of the US dollar and Treasury yields.
As a result, on Friday, both the US dollar and the 2-year Treasury yield were under pressure. They have rallied on Monday as a measure of investor confidence returned. A renewed sense of optimism is spreading. This spike is due in large part to the potential for improved trade relations with China and the optimistic economic signals that have been emerging from the US.
Approximately 30% of S&P 500 companies have reported their earnings thus far, with impressive results: 87% have delivered positive earnings per share (EPS) surprises, while 83% exceeded revenue expectations. This trend is a further testament to the strength of corporate fundamentals in the face of continued global economic doubt.
Across the pond, UK inflation data pointed to a further easing in headline inflation, falling to 3.5%. Retail sales shocked analysts to the upside by rising for a fourth straight month, indicating strong consumer spending. Nonetheless, even with this positive news, the Bank of England (BoE) is bracing for fraught debates over any future rate cuts. Policymakers continue to struggle with a perplexing array of economic indicators.
The movements in the Japanese market have been huge, with the Nikkei index in particular having an exponential rally. This increase is mainly due to Takaichi’s urging toward a more expansionary monetary policy by the Bank of Japan (BoJ). It’s indicative of the U.S.’s overall increase in fiscal spending, particularly the direction shot into the tech, defense, nuclear power and cybersecurity sectors.
Every market participant is anxiously looking ahead to this week. The market is expecting earnings reporting from most of the big tech stocks — Microsoft, Alphabet, Meta, Apple and Amazon. These results will provide further insights into the tech sector’s performance and could influence market sentiment as investors navigate an uncertain economic environment.
The USDJPY is surging further and close to the 153 level. If the divergence in monetary policy between US and Japan continues, it could exceed those levels diving between to test 155-160 ranges. This sharp move is a clear manifestation of larger macro trends in global finance driven by the impact of central banks’ monetary policies and economic signals.
October’s preliminary CPI data should confirm that inflation is moderating a bit – but not enough. This comma might come to shape the next two decades of monetary policy. The European Central Bank (ECB) appears on track to hold interest rates unchanged at its next meeting. Aside from the recent stress test expansion this decision will do more to shore up the settled economic status quo.