Budget budget budget

Last Friday the US economy added 254,000 jobs, well ahead of the 140,000 expected and the strongest jobs growth in six months. This was a real boost to equity markets where concerns of slowing economic growth were halting momentum. The feedthrough this week has been the S&P 500 Index closing at record highs on Wednesday and the yield on the US-10 year government bond rising above 4%.

To put this in perspective, the yield at the beginning of October for the 10-year was 3.7%. Bond prices work inversely to that of yields, rising yields mean falling prices. We have been concious of the move in bonds and the expectation that so many rate cuts had been priced into markets. Maintaining a cautious approach to duration risk has rewarded performance over this time.

Stronger economic data is likely to maintain bond volatility and herald a slower rate cutting cycle. The combination of job additions in conjunction with US inflation data on Thursday showing a core inflation rate of 3.3%, boosted confidence in the backdrop, while adding to concerns that inflation remains in the system.

After a resounding couple of weeks following the Chinese stimulus announcement, the Hong Kong market experienced its biggest one day fall since the global financial crisis. This Saturday, the Chinese Minister of Finance is expected to announce further stimulus measures to support the Chinese economy. Whilst analysts are expecting a significant boost, markets appeared less confident. One to watch!

While elections are in focus for now in the US and Japan, the new Prime Minister of France and former Brexit negotiator Michael Barnier, announced a shock 2025 budget including spending cuts and tax increases. Austerity is gradually returning, adding to the gloom felt toward Europe, aligning with our more cautious position in the region.

On the brightside of the English channel, UK GDP rose 0.2% month on month for August. This has seen the mid-cap section of the UK market be amongst the best performing equity indices of the last quarter. Meanwhile, the recent rally in the UK 10-year Government bond yield has been partly attributed to the uncertainty around the UK budget by some commentators. Hopefully the current government have learnt from the 2022 budget – we would like to think so!

Looking ahead

Next week focus will turn to Europe and the European Central Bank (ECB), where a rate cut of 0.25% is expected. Markets are pricing three rate cuts in a row now as inflation comes down and European growth stagnates. In Japan, there will be the release of inflation data, with the market currently pricing in the the next rate hike in January 2025. Finally China will release third quarter GDP figues on Friday following retail sales and industrial production numbers. Politicians will also be hoping that the costs and after-effects of Hurricane Milton wiill not create too much of a drag, although it already seems that the event is being politicised in the tightly fought election battle.