Macro and Markets Review for October 2024
Gary Dugan, Chadi Farah, Bill O'Neill
The Global CIO Office
From a macro perspective, the global economy was relatively stable in October, with few significant surprises. Inflation and growth data in developed economies largely aligned with expectations (see Chart 1). Central banks continued their easing trajectories: the ECB implemented its third rate cut of the year, bringing rates down to 3.25%, while the Bank of Canada made a notable 50 basis point cut—its largest rate reduction in four years.
Chart 1: Global Economic Surprise Indices – Inflation and Growth
Index
Source: Bloomberg
In terms of growth, the United States stood out, with a series of economic indicators pointing to relatively robust consumer spending growth. Third-quarter GDP growth was 2.8%, driven by a strong 3.8% annualized increase in personal consumption.
In Japan, growth momentum stalled due to uncertainty surrounding a snap election. The newly appointed Prime Minister from the LDP made the controversial decision to call a general election, which led to significant losses for the party, including its overall majority in the Diet. At the time of writing, coalition negotiations are still in progress, with an LDP-led coalition remaining the most likely outcome, as the LDP retains its position as the largest party in the Diet. This potential shift toward a pro-growth government could prompt the Bank of Japan to proceed with its plan to raise interest rates at its upcoming November meeting.
Chart 2: Global Economic Growth Surprise Indices – US Back on Track
Index
Source: Bloomberg
The primary shock to the global economy in October stemmed from a notable increase in U.S. long-term interest rates. By the end of the month, the 10-year Treasury yield had reached 4.38%, a four-month high, signaling heightened investor concerns. Additionally, the MOVE index, which tracks bond market volatility, surged to its highest level in nine years.
This rise in yields was particularly unsettling for investors, as it appeared disconnected from typical inflation concerns. Instead, it reflected deeper worries about the sustainability of U.S. debt levels and the prospect of continually rising indebtedness. With the U.S. presidential election on the horizon, investor focus has sharpened on these fiscal challenges. Persistently high fiscal deficits and the accumulation of government debt have raised the possibility of an ongoing increase in the risk premium associated with U.S. debt. As October drew to a close, the real yield on the 10-year U.S. government bond climbed to its highest level in years, underscoring these concerns (see Chart 3).
Chart 3: US 10-year Government Yields Adjusted for Inflation Rise to the Highest in some Years
Source: Bloomberg
Markets
Equities
The equity market had a poor month, although dollar returns of non-US markets were exaggerated to the downside by the dollar’s strength. The cut in interest rates by the ECB was helpful for European markets. However, the details of the framework for fiscal consolidation in the eurozone had analysts concerned about the impact on long-term growth from ongoing cuts in government spending.
There was some sharp profit-taking in India after the market’s valuation peaked. Weaker than expected economic growth combined with some tactical switching into Chinese equities. The Chinese market managed to hold on to the gains in recent months as the government continued to trickle new policies to support the economy.
Table 1: Equity Market returns for October
Equity sector performance
The back up in the US 10-year bond yield saw some sharp profit taking in interest rate sensitive sectors other than the banks. The Global REITS index fell 5% over the course of the month.
Table 2: Global equity sector returns for October
Source: Bloomberg
The technology sector saw some mixed 3Q corporate earnings results with some poor outcomes for some of the semi-conductor companies. ASML for example fell 22% on the month as the third quarter earnings report came in below expectations. Q3 bookings were 50% below consensus forecasts. In our view it would be wrong to get too negative about the outlook for tech sector as in aggregate corporate profits earnings forecasts for the NASDAQ index has held in well over the past months.
Chart 4: NASDAQ index rises Less than Projected Earnings
Source: Bloomberg
Bond markets
It was a poor month for bond markets with yields markedly higher. The losses on the month wiped out around 25% of year-to-date gains in conventional bond markets. As we mentioned earlier, the problem in the US of high budget deficits and record levels of government debt, relative to GDP, are starting to weigh on the government bond market pricing. Through the campaign neither Presidential candidate saw merit in arguing for a significant reduction in government spending over the medium term!
Chart 5: US 10-year Yields on the rise Precipitating Drop in Global Agg Index
Source: Bloomberg
Spreads continued to narrow as mutual fund money flows continue to chase relatively high nominal yields om US corporate high yield and emerging market debt.
Chart 6: Emerging Market Debt Spread Over Treasuries Moves Closer to the Lows
Source: Bloomberg
Table 3: Bond market returns for October
Source: Bloomberg
FX and Precious metals
The dollar reversed its recent weakness and performed strongly, partly on the market view that a Trump victory was more likely. Ironically the gold price also rose despite the dollar strength possibly taking the view that a Trump victory would lead to greater geopolitical challenges. Donald Trump has made some speeches during the Presidential campaign in support of crypto currency hence another factor to support the ongoing rise in Bitcoin. UK sterling was under some pressure at the end of the month when the new government’s budget was not taken well by the markets.
Table 4: Monthly performance of precious metals and currencies for October
Source: Bloomberg
SDAX Investment Deals
