Thoughts For the Week Ahead
The Week That Was
Wall Street experienced a robust rally on Friday, buoyed by stabilising Treasury yields and traders and investor reactions to recent economic data and assertive comments from the US Federal Reserve (Fed).
The S&P 500 climbed 1.5%, reaching a 7-week high, while the Nasdaq surged by 2%. The Dow Jones also saw a notable increase, gaining 391 points. However, this optimism was tempered by the University of Michigan's consumer sentiment index, which dipped to a six-month low, falling short of expectations.
Fed Chair Powell's recent remarks struck a decidedly hawkish tone, emphasising the Fed's readiness to further hike interest rates if deemed necessary. This stance influenced market dynamics, particularly in the technology sector. Major tech stocks witnessed significant gains, with Microsoft soaring by 2.5% to an unprecedented high. Apple, Alphabet, Amazon, and Nvidia also enjoyed increases, ranging between 1.8% and 2.9%.
In contrast, certain sectors faced setbacks. Diageo reported an 11.7% drop following its announcement of anticipated weaker profit and sales in the first half of its fiscal year. Similarly, Plug Power experienced a dramatic 40.5% plunge after its third-quarter results fell short of analyst predictions.
Reflecting on the week's overall performance, the S&P 500 ended with a 1.1% gain, the Nasdaq advanced by 2%, and the Dow Jones added a modest 0.6%. This mixed picture highlights the ongoing balance between optimism in certain sectors and caution in others, as market participants navigate a landscape shaped by monetary policy and varied corporate performances.
On Friday, the JSE All Share Index experienced a downturn, dropping approximately 1.2% to conclude the trading day at 71 393, marking its lowest level in over a week. This decline came as market participants evaluated the implications of assertive statements from major central banks regarding monetary policy.
Amidst this backdrop, traders and investors remained vigilant, closely tracking economic data releases from various global economies. The trading day saw a distinct divergence in sectoral performance. Resource-linked sectors faced significant challenges, dropping by 4%, indicating a notable pullback in traders and investor confidence in these areas. In contrast, the financial sector showed resilience, registering a modest gain of 0.5%.
Over the course of the week, the cumulative effect of these market movements led to the JSE All Share Index shedding around 2% of its value.
The Week Ahead
In this week, the US financial market is poised to focus on the October Consumer Price Index (CPI). Expectations are set for a modest 0.1% increase in consumer prices from September, which would be the smallest rise in four months, primarily driven by a decrease in gasoline prices. However, when excluding volatile components like fuel and energy, the core CPI is projected to ascend by 0.3%, mirroring September's rate and maintaining the annual rate at 4.1%.
Additionally, US retail sales are forecasted to experience a slight decline of 0.1%, potentially marking the first downturn in seven months. The ongoing US earnings season will also be in the spotlight, with major companies such as Home Depot, Cisco, Target, Walmart, and Applied Materials scheduled to announce their quarterly results.
In the UK, the economic agenda is filled with crucial data releases, including inflation, unemployment, and retail sales. The annual inflation rate is expected to ease to a two-year low of 4.8%, down from 6.7% in September. Retail sales are predicted to show a rebound, while the unemployment rate is likely to continue its upward trajectory in the third quarter.
Meanwhile, the Euro Area is set to release the second estimates of its third-quarter GDP.
In Asia, China's economic indicators, including industrial production, retail sales, unemployment, lending, and investment figures for October, will draw significant attention. Recent data suggested that the economy might be struggling to sustain its recovery from the third quarter, casting doubt on achieving Beijing’s 5% GDP growth target for the year.
Japan's economic focus will be on its third-quarter GDP, which is anticipated to reveal a contraction. The October trade balance will also be closely watched, offering insights into the effects of the yen's ongoing depreciation.
Key Themes for the Week Ahead
Traders and investors are poised for the release of the US Consumer Price Index (CPI) data for October on Tuesday. This update is significant as it will shed light on the Fed's ongoing efforts to reduce inflation from the high levels experienced last year.
The CPI for October is projected to show a slight increase of 0.1% on a monthly basis. Despite a 0.4% rise in September's CPI, driven unexpectedly by a surge in rental costs, there was an observable moderation in core inflationary pressures.
If the upcoming data reveals a more pronounced decrease in inflation rates, it could intensify discussions about the potential peak of interest rates. This speculation is partly based on the October employment report, which indicated a softening in the labour market.
Additionally, the US will release data on producer prices and retail sales for October. Retail sales are expected to show a decline, marking a change from the consistent gains seen in previous months.
Other forthcoming economic reports include updates on industrial production, housing starts, and initial jobless claims, all of which will provide further insights into the current state and trajectory of the U.S. economy.
Throughout the week, traders and investors will have the opportunity to gain insights from various Fed officials. Notable figures such as New York Fed President John Williams, Chicago Fed President Austan Goolsbee, Governor Philip Jefferson, and Governor Michael Barr will be speaking, as the policymakers deliberate over potential further monetary tightening before their next meeting scheduled for 12-13 December.
Last Thursday, Fed Chair Jerome Powell expressed a lack of confidence in whether the current interest rate levels are sufficient to conclusively address inflation. Powell highlighted the Fed's caution against overtightening of policy, emphasising that the greatest error would be failing to effectively control inflation.
This sentiment was reinforced by other Fed officials. For instance, San Francisco Fed President Mary Daly stated on Friday that it is too soon to determine if the Fed has finished increasing rates.
Market participants have been particularly attentive to benchmark Treasury yields, which have recently retreated from 16-year highs. This movement reflects the market's evaluation of whether interest rates have reached their peak and speculation about when the Fed might begin reducing rates. This assessment is crucial in shaping investor strategies and expectations regarding the future trajectory of the US economy and monetary policy.
US retail earnings
As the US third-quarter earnings season approaches its conclusion, attention is turning towards major retailers set to release their reports in the week. These reports are eagerly anticipated by traders and investors seeking insights into the current state of consumer spending.
Home Depot is scheduled to announce its results before the market opens on Tuesday. This will be followed by Target, which is expected to report its earnings ahead of Wednesday's market opening. On Thursday, the focus will shift to Walmart and Macy’s, both of which are due to publish their results.
Target has faced challenges recently, grappling with rising costs. The company has had to revise its financial guidance multiple times, citing "shrinkage" – a term for goods lost to theft – as a significant impact on its bottom line.
In contrast, Walmart’s shares reached record highs earlier this month, propelled by increasing revenues and profits that surpassed expectations in its August report.
The week will also see earnings reports from other key players in the retail sector, including TJX Companies, Gap, and China’s e-commerce giant Alibaba. These reports will provide a broader view of the retail industry's performance, offering valuable indicators of consumer trends and economic health.
US government shutdown risk
The threat of a federal government shutdown is on the horizon in the US, should lawmakers in Washington fail to enact a funding measure to sustain government operations temporarily by Friday.
Throughout much of 2023, the Republican party has been internally divided over demands for substantial spending cuts and the inclusion of policy riders, such as abortion restrictions. This discord has seen a faction of Republican centrists advocating for a more bipartisan strategy that would be more likely to garner support in the Senate.
In response to this looming crisis, US House Speaker Mike Johnson introduced a Republican stopgap spending bill on Saturday. This proposal, designed to prevent a partial government shutdown, was met with immediate criticism from members across the political spectrum.
Such ongoing disputes and the potential for a government shutdown could reignite concerns regarding the stability and effectiveness of governance in the world's largest economy, casting a shadow over its political and economic landscape.
Oil price volatility
Oil prices saw an increase of approximately 2% on Friday, bolstered by Iraq's endorsement of OPEC+'s decision to reduce oil production ahead of their meeting scheduled in two weeks.
Additionally, the uptick was partly driven by some speculators who decided to cover substantial short positions, aiming to mitigate risks associated with uncertainties over the weekend.
Despite this gain, oil prices concluded the last week with a cumulative loss of 4%, marking their third consecutive week of decline. This downward trend reflects broader concerns about the global demand for oil, which have overshadowed worries about potential supply disruptions due to conflicts in the Middle East. These concerns have been exacerbated by recent weak economic data emerging from major economies like China, the US, and the UK.
Looking forward, energy traders are focusing their attention on the upcoming meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, scheduled for 26 November. Analysts are contemplating the possibility that OPEC+ may implement further cuts in oil supply if the downward trend in prices persists, which could have significant implications for the global oil market.
South Africa News
Khumbudzo Ntshavheni, the Minister in the Presidency, has announced that the government is currently developing new legislation aimed at legalising artisanal or small-scale mining. This initiative marks a significant step towards formalising this sector and reflects the government's commitment to regulating and supporting small-scale mining operations.
President Cyril Ramaphosa's son, Andile Ramaphosa, is facing legal action due to unpaid levies on his property. The body corporate of the residential complex in Edenburg, Sandton, where he owns a property, has filed a case against him in the Johannesburg High Court. Andile Ramaphosa is accused of accumulating arrears exceeding R219 000 in levies for his property located in this affluent suburb.
The Treasury has acknowledged the necessity to increase borrowing in this fiscal year to support government expenditure. However, Duncan Pieterse, the director-general, has cautioned that relying on additional borrowing is not a viable strategy for stimulating the economy. He emphasised that this approach would exacerbate the nation's escalating debt crisis, highlighting the need for more sustainable fiscal solutions.
In the upcoming economic calendar for this week, several significant events are scheduled to take place.