I mainly focused on two things last week: earnings and the UK budget. 169 S&P 500 companies reported earnings last week, but most investors were focused on the five reporting “Mag 7” companies – GOOG, AMZN, MSFT, META and AAPL. The UK autumn budget has come and gone, with the Gilt market initially puking on it but then settling…..sort of. A slew of economic data was also released last week which – although mixed in some respects – continues to support a US economy gliding towards a soft landing, as well as a perhaps a slightly better-than-expected European economy. In Asia, the Bank of Japan kept its monetary policy on hold. Global stocks were mostly weaker, and UST yields rose. This coming week, all eyes will be focused on the US election on Tuesday, although both the Fed and Bank of England will deliver monetary policy updates, with both expected to reduce their respective policy rates by 25bps.
WHAT MATTERED LAST WEEK
UK budget: The autumn budget for the UK was delivered to Parliament on Wednesday afternoon by Labour’s Chancellor of the Exchequer Rachel Reeves. If you want a summary of the budget, this is good (source BBC and accessible), or if you’d prefer to “get into the trees”, this is the full budget in all its glory from HM Treasury. According to the “Economic and Fiscal Outlook” prepared by the Office of Budget Responsibility and reflecting the budget, the government will increase annual expenditures by £70 billion / annum over the coming five years, financed roughly half with tax increases and half with borrowings. Naturally, the additional borrowings required to partially finance Labour’s grand plan initially spooked the Gilts (i.e. UK government bond) market although things seemed to have settled down slightly by the end of the week. Even so, it is clear that the bond vigilantes aren’t fully comfortable with the budget, taking Gilt investors on a wild ride last week as you can see in the yield graph below for 10y Gilt:
If you can’t be bothered to read about the budget, then this eight minute interview with Chancellor Reeves by Lizzy Burden of #Bloomberg Talks is worth a listen, and should be accessible (audio only) for free on #YouTube here.
The autumn budget might not be of much interest to my subscribers that are not in the UK, but I feel compelled to make two points. Firstly, the tax rises are a major reason that some people who will face a more hostile tax environment are considering leaving the UK. Secondly, running up further debt to fund Labour’s grand plan is precarious, likely to leave rates higher in the UK for longer and essentially working against the Bank of England’s fight to normalise inflation. Moreover, the budget is not particularly inspiring from a growth perspective, as the OBR has reported. Ultimately, the UK bond market will be the litmus test for the viability of the budget. Let’s see what happens in the coming days, as concerns about UK finances might be quickly forgotten as the pending U.S. Presidential election takes centre stage.
US jobs: There was plenty of jobs data last week in the States, culminating with the October jobs report released on Friday by the Bureau of Labor Statistics which reported a sharp reduction in jobs added in October. The unemployment rate remained constant at 4.1%. Earlier in the week, the JOLTS report for September showed that the number of new job openings decreased by circa 500k compared to the revised August figure, coming in lower than expected and suggesting that the US jobs market was cooling. Bucking this trend, weekly first time jobless claims – released Thursday – came in slightly lower than expected. Overall, US jobs data, along with slightly weaker-than-expected ISM manufacturing data for October released on Friday, points to a US economy heading towards a soft landing.
PCE (Fed’s preferred inflation indicator) for September (US): Although the US economy is gradually slowing, both headline and core PCE ticked up in September, certainly not what the Fed was hoping for (BEA press release here). Bond yields did not react much on Thursday following the release, but the stock market was clearly spooked as US stocks fell sharply as investors digested the increasing likelihood of “higher for longer”. It is hard to believe that the yield on the 10y UST is back to 4.37%!
GDP and other data in the US and Europe: For the third quarter according to data released last week by the BEA, US GDP was slightly worse than expected (2.8% actual YoY vs 3% expected), down slightly too from revised 2Q24 GDP growth of 3.0%. European 3Q24 GDP was slightly better than expected compared to 2Q24 GDP growth (0.4% MoM vs 0.2% expected), albeit sluggish to say the least (Eurostat press release here). Compared to the third quarter of the year before, EU and Eurozone GDP is running at 0.9% YoY, trailing US economic growth significantly. Also in Europe, flash inflation for October was in line with expectations, slightly higher than in September with services again being the culprit. Unemployment for October in the Eurozone and broader EU was flat MoM, and slightly lower than one year ago.
Tech earnings: The five Mag 7 companies that reported earnings last week beat top and bottom line consensus expectations nearly across the board, but the combination of ongoing capex spend focused on AI and more reserved guidance in some cases caused most shares to decline WoW, with the exceptions being GOOG and AMZN. The table below summarises the results of the Mag 7 companies for the week, along with their share performance WoW and YtD, and various valuation metrics compared to those of the broader market.
I intend to look more thoroughly at the Mag 7 companies in the coming days.
Bank of Japan monetary policy decision: The BoJ held firm on its monetary policy approach although the central bank presented more robust economic growth data in the commentary in their revised outlook, which you can find here: “Outlook for Economic Activity and Prices (October 2024): The Bank’s View”. This was enough to stabilise the Yen, which was down only marginally on the week, although Japanese stocks reacted poorly to the news, losing ground on Thursday and Friday following the BoJ decision.
MARKETS LAST WEEK
Global equities were generally weaker, with only the Nikkei 225 (Japan) eking out a small gain for the week. US equities were weaker with the exception of the small-cap dominated Russell 2000. Earnings were mixed for S&P 500 companies as reported above. The weekly earnings summary for the S&P 500 can be found in “Earnings Insight” (#FactSet) or “This Week in Earnings” (#LSEG I/B/E/S). Mixed earnings and higher yields were not favourable for stocks, and the uncertainty of the US election this coming week casts a shadow, too.
US Treasury yields were higher week last week, spurred by a combination of slightly higher PCE data for September, and sufficiently mixed economic data to suggest that the US economy is slowing albeit at an acceptable pace. According to the #CME #FedWatch Tool, expectations are still for the FOMC to reduce the Fed Funds rate by 25bps at each of its final two meetings this year, the first of which is this week.
Corporate credit yields increased slightly but spreads were stable to slightly better last week, as credit continues to perform well.
Gold was a touch weaker, with the US Dollar flat and the Yen a touch lower. Oil prices declined as there was little change in the complex situation in the Middle East. Bitcoin had a volatile week, surging above $73,500 on Tuesday before settling to close the week at $69,483, +4.3% WoW.
MY TRADES LAST WEEK
I completed some stock sales and gifts early in the week, ahead of the new budget in the UK, which proved wise in that the capital gains tax in the UK was lifted. The sales / transfers out early in the week included shares of AAPL, AMZN, GOOG and PEP, all from taxable accounts. This follows similar trades the week before – some in the same names – which has increased my liquidity overall and adjusted my portfolio mix slightly away from Mag 7 names. To offset some of these sales in taxable accounts, I (re)added positions in some of the same stocks in tax-advantaged (retirement) accounts. These included shares in MSFT, PEP and JNJ, suggesting an ongoing more defensive tilt (to the “boring stuff”). I also traded in and out of call options in GOOG and AMZN, both quick and profitable trades as my feelings on each of these companies going into earnings was positive. I also bought LLY calls (Dec and March, 900 strike) after-earnings, which were disappointing; time will tell how these calls do, although I will look to exit when (and if) these positions turn positive.
WHAT’S AHEAD
This coming week, focus will be on the US Presidential election on Tuesday and the aftermath, which will hopefully pass quickly. May the best candidate win, and may it be the peoples’ choice either way. Stability will keep the markets rolling, confusion will not, so let’s hope for the best. Two days after the US election, the FOMC – which meets Weds and Thurs in its penultimate monetary meeting of the year – will announce its monetary policy decision. Investors are expecting to see a further 25bps reductions in the Fed Fund rates at this meeting, as well as at the final FOMC meeting in December. The Bank of England also has its Monetary Policy Committee meeting this week and is expected to reduce the Bank Rate by a further 25bps. Other economic data will be released this coming week but focus will give way to the US election and the two central bank meetings.
Earnings: 102 additional S&P 500 companies will report earnings next week, including NVO, MAR, NXPI, ARM, MTCH, QCOM, CVS, HSY, SMCI (under pressure), ABNB, NRG and PLTR, among others. There are a lot of utilities reporting earnings this week.
Monetary policy meetings:
FOMC: Nov 6/7 (expect 25bps reduction in Fed Funds rate) and Dec 17/18
Bank of England: Nov 7 (expect 25bps reduction in Bank Rate) and Dec 19
ECB: Dec 12
Bank of Japan: Dec 18/19
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