US
This week was a bumper week for US stock markets after positive FED comments and cooling labor market fuelled investor sentiment that rate rises might be a thing of the past. The Dow Jones Industrial Average rose 5.07%, over 1,600 points, while the S&P 500 added 5.85% and the tech-heavy Nasdaq Composite gained over 6.60%.
The Federal Reserve made an important decision on Wednesday by keeping its benchmark interest rate unchanged for the second consecutive time. Simultaneously, the central bank upgraded its outlook for the U.S. economy and kept the door open for potential future rate hikes, especially if inflation accelerates in the coming months. In its statement following the meeting, the Fed announced its intention to maintain the federal funds rate in the range of 5.25% to 5.5%, a level established in its previous meeting back in July. The Fed has only increased its key short-term interest rate once since May, reflecting its cautious approach to monetary policy.
The Fed's statement highlighted the recent turmoil in the financial markets, which has driven longer-term interest rates to levels not seen in over 15 years, leading to higher borrowing costs across the U.S. economy. Fed Chair Jerome Powell, during a news conference, expressed concerns that prolonged high levels of longer-term interest rates could slow down the economy. However, he also noted that the Fed isn't yet confident that its benchmark rate is sufficiently high to curtail long-term growth.
In contrast to the Fed's monetary policy decisions, fresh data revealed robust U.S. labor productivity growth, surging at an annualized rate of 4.7% in the third quarter. This is the fastest growth rate outside of recessionary periods since 2003, and it follows a 3.6% increase in the second quarter. Enhanced productivity is essential for establishing a virtuous cycle of growth, particularly in the face of tight labor markets, inflation, and high interest rates - this also underlines just how robust the US economy is right now.
Meanwhile, the stock market experienced gains on Friday as investors reacted to news of slowing job growth in the U.S., a development that could bolster expectations that the Federal Reserve has concluded its rate-hiking campaign. In October, the U.S. economy added 150,000 jobs, falling short of the expected 180,000, with auto industry strikes contributing to the shortfall, according to the Bureau of Labor Statistics. The unemployment rate also edged higher to 3.9%. The health of the labor market holds significant importance for Fed policymakers, and signs of a slowing economy could support the case for the central bank refraining from further rate hikes this year.
Mexico
Mexico's economy displayed its resilience by expanding for the eighth consecutive quarter between July and September, primarily driven by robust domestic consumption and increased industrial activity. According to a preliminary estimate from Mexico's national statistics agency INEGI, the country's gross domestic product (GDP) grew by 0.9% in the third quarter compared to the previous three-month period. This exceeded the expectations of economists polled by Reuters, who had anticipated a growth rate of 0.8%. However, there are concerns that a slowdown in 2024 may become more pronounced as monetary policy exerts a greater impact, the strength of the peso curtails trade growth, and weaker growth in the United States weighs on Mexico's external sector.
Mexico's diversified conglomerate, Femsa, is planning to complete a series of asset sales in the coming year as part of its efforts to reduce debt. The company, which controls one of the world's largest Coca-Cola bottlers and a wide-ranging chain of Oxxo convenience stores, sold its stakes in Dutch brewer Heineken and U.S. wholesaler Jetro Restaurant Depot earlier this year. These divestments represent about 10% of Femsa's initial plan to refocus on core businesses. The company aims to strengthen its financial position by unloading additional assets.
In the aftermath of Hurricane Otis, a Category 5 storm that wreaked havoc on the Mexican Pacific resort city of Acapulco, the toll of destruction continues to rise. The government of Guerrero, a southern state in Mexico, announced on Monday that the number of people dead and missing has reached 100. Hurricane Otis unleashed its fury with winds of 165 miles per hour (266 km per hour), flooding the city, causing extensive damage to homes, hotels, businesses, and infrastructure, as well as disrupting communications, road and air connections. While the government has allocated $3.4 billion in financial aid, experts in the field of financial modeling predict that the hurricane's economic impact could surpass $20 billion, underscoring the significant challenges faced by the affected region.
Europe
Europe also benefitted from positive news from the US this week as stock market volatility eased with all major European indexes enjoying positive returns. The UK’s FTSE 100 rose 1.73% for the week, Germany’s DAX was up 3.425% by Friday’s close while Spains IBEX closed up 4.21%.
The Bank of England decided to maintain its main interest rate at the 15-year high of 5.25% on Thursday. The central bank also indicated that it is likely to keep borrowing costs at elevated levels, especially if there is a significant increase in oil and gas prices due to the ongoing Israel-Hamas conflict. The Monetary Policy Committee, consisting of nine members, stated that while inflation, as measured by the consumer price index, is expected to decline substantially in the coming month, it will require time to approach the 2% target rate over the next year. Bank of England Governor Andrew Bailey emphasized that they will closely monitor the need for further rate increases and that it is premature to consider rate cuts at this stage.
On the other hand, the euro area economy faces the risk of slipping into a recession later this year, as official data released on Tuesday revealed a slight contraction in output during the third quarter. According to Eurostat, the European Union's statistics office, the Gross Domestic Product (GDP) of the 20 countries in the eurozone declined by 0.1% in the July-to-September quarter compared to the previous three months. This comes after a meager 0.2% growth in the April-to-June quarter and underscores the delicate balance between economic contraction and expansion in the eurozone. The concern is that the Israel-Hamas conflict could have a spillover effect on European economies, leading to lower regional trade, tighter financial conditions, increased energy prices, and reduced consumer confidence. A Goldman Sachs analyst highlighted these potential economic implications.
Asia
Japanese Prime Minister, Fumio Kishida, unveiled a significant stimulus package worth more than 17 trillion yen ($113n) on Thursday. This package includes measures such as tax breaks and support for low-income households. However, some critics have characterized this initiative as populist spending, expressing concerns about its impact on Japan's national debt. Kishida emphasized that his primary objectives are to combat deflation and revitalize the economy. He argued that tax revenues will increase as the economy grows, ultimately contributing to fiscal health. The stimulus package was endorsed by his Cabinet earlier in the day.
In a related economic development, the Bank of Japan (BOJ) maintained its monetary policy targets. The central bank retained its -0.1% target for short-term interest rates and maintained its objective for the 10-year government bond yield to hover around 0%. In light of the relatively higher interest rates elsewhere, Japanese investors, as well as others globally, have shifted their investments into U.S. Treasuries, capitalizing on the more favorable returns. Japan currently holds the position of being the largest foreign holder of U.S. government debt, according to official federal data.
In China's wealthiest city, Hong Kong, Halloween parades served as a platform for young people to express their concerns about the country's economic challenges. The backdrop was a record surge in borrowing costs for certain banks, highlighting the economic pressures faced by China. Thousands of revelers in Shanghai joined in Halloween celebrations, showcasing costumes that carried pointed social commentary about the state of the world's second-largest economy. One costume featured a man dressed as the Shanghai Composite Index, symbolizing one of the worst-performing stock markets globally this year, while holding a bunch of leeks.
Meanwhile, British Prime Minister Rishi Sunak and his Indian counterpart Narendra Modi discussed the significance of securing an "ambitious" trade deal. Talks between the two countries have been ongoing, and there is a possibility that a deal could be finalized this year. A UK government spokesperson revealed that the leaders discussed recent progress in negotiations for a Free Trade Agreement and shared the view that a mutually beneficial ambitious deal is essential for both sides.
[Disclaimer: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial advice. Consult with a qualified financial professional before making any investment decisions.]
Comments