Volatile end to the week
Markets had a volatile end to the week. Concerns related to a couple of US regional banks saw US equities fall sharply on Thursday but rebound on Friday, taking back most of the previous day’s losses. This ‘risk off’ environment on Thursday saw US bond yields fall with 10-year yields getting below 4% however, again, much of this was reversed on Friday with yields ticking back up. The euro gained against the US currency for much of last week, from lows of €1.1550 on Tuesday to trade over $1.17 on Thursday though it fell below that level on Friday and starts off today at $1.1660. Sterling similarly gained against the dollar, trading around $1.3420 now from close to $1.3250 at times last week. Against the euro, sterling is trading in a more narrow range around 86.5p-87p currently.
US yields ticked up on Friday but are generally under downward pressure. As markets await the Fed’s next move, with another 25bps cut priced in, 2 years yields lost 4bps last week to 3.46% and down from 3.6% at the end of last month, similarly 10-year yields are at just above 4%, down from 4.15% at the end of September. German bonds also ticked up on Friday, by just a basis point or so, to 2.58% but they too are trending down, despite the ECB staying on hold for the foreseeable future, losing about 15bps over the past two weeks.
The main US equity indices recovered most of the ground lost on Thursday during Friday’s session, with the S&P 500, Dow and NASDAQ up 0.5% on Friday to close more or less flat for the two days and up on the week. European stocks, however, were lower on Friday with the Eurostoxx down 0.8% for the day but that was not enough to offset sizable gains earlier in the week so it too closed up on the week. Asian equities have gained sharply overnight, with the Nikkei up over 3%, and European stocks are rising on the open this morning.
FOMC voting member, St Louis Fed president, Musalem said on Friday that he would support another rate cut. He said that that he ‘could support’ a path with addition reduction in the policy rate if further risks to the labour market emerge and while it was ‘particularly important’ right now to go meeting to meeting and not be on a preset course, he estimated current policy to be somewhere between modestly restrictive and neutral with ‘limited room’ for further easing before policy becomes overly accommodative. Separately, Fed Governor Waller said the FOMC should reduce the policy rate by another 25bps at the next meeting as the labour market was giving ‘clear warning signs’ and the current policy rate was 100bps-125bps higher than what he viewed the neutral rate to be. Recent President Trump appointed Governor Miran said he would vote to lower rates and argued for a more aggressive reduction path, which is unsurprising as he was the only FOMC member to vote for a 50bps reduction at the September FOMC meeting, his first as a Governor.
Looking to the day ahead, there is limited data today and for this week with many US releases still curtailed due the Government shutdown. We will get several ECB speakers over the next few days and later this week, UK retail sales and inflation, US CPI inflation as well as early October PMI readings.