US politicians passed temporary funding legislation and avoided a shutdown. Inflation in the US and Europe continues to decline

By JustMarkets

At Friday’s close, the Dow Jones Index (US30) decreased by 0.47% (-1.18% for the week), while the S&P 500 Index (US500) lost 0.27% (-0.52% for the week). The NASDAQ Technology Index (US100) closed positive by 0.14% (+0.36% for the week) on Friday. The PCE core deflator for August, the Fed’s preferred measure of inflation, fell from 4.3% to 3.9% y/y, the lowest reading in 2 years. The favorable news of lower inflation boosted positive sentiment in equities. However, hawkish comments from New York Fed President Williams on Friday pushed bond yields slightly higher and pulled stocks back from better levels when he stated, “My current assessment is that we are at, or near, the peak level of the target range for the federal funds rate, though I expect we will need to maintain a restrictive stance of monetary policy for some time.”

The fundamental picture in the stock market appears to be changing as stocks are unable to bounce back with the same vigor. Rising bond yields are putting pressure on tech companies, and investors are worried that inflated valuations of mega-companies, including Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN) could be another weakness. Meanwhile, the “hype” around artificial intelligence is decreasing, and tech stocks are showing signs of vulnerability to rate hikes.

A negative factor for stocks on Friday was the likely US government shutdown, as Republicans in the House of Representatives could not agree on a plan to continue funding federal operations until October 1. However, the US Congress passed a temporary funding bill on Saturday after Republican House Speaker Kevin McCarthy dropped an earlier demand by his party’s hardliners. The House voted 335-91 to fund the government through November 17. The move marked a profound shift from early last week when a government shutdown seemed all but inevitable. A government shutdown would mean that most of its 4 million employees would not receive a paycheck – whether they are working or not. And it would also have led to a shutdown of a host of federal agencies, from national parks to financial regulators.

Equity markets in Europe were mostly up Friday. Germany’s DAX (DE40) rose by 0.41% (-0.82% for the week), France’s CAC 40 (FR40) gained 0.26% on Friday (-0.61% for the week), Spain’s IBEX 35 (ES35) added 0.01% (-0.43% for the week), and the UK’s FTSE 100 (UK100) closed up by 0.08% (week-to-date -0.99%). The Eurozone Consumer Price Index for September declined to 4.3% y/y from 5.2% y/y in August, the lowest reading in nearly two years. German retail sales in August unexpectedly declined by 1.2% m/m, which was weaker than expectations of 0.5% m/m growth and was the biggest decline in the last 8 months. All these factors indicate that the ECB will probably not raise rates again.

With OPEC+ week ahead, there is likely to be an ongoing dispute over how much oil prices can rise. However, Saudi Arabia and Russia face some difficulty in developing a rally. Saudi oil imports to India totaled less than 500,000 barrels a day in September, the lowest monthly level in nearly a decade, as global benchmark Brent crude hit a high of nearly $98 from a March low just above $70. Oil shipments from Saudi ports last month were up 300,000-400,000 barrels a day from August – despite a so-called “lollipop cut” of one million barrels a day – and that trend could continue. Oil prices fell on the last trading day of September amid growing concern about how the world will cope with rising energy prices in the coming months.

Saudi Aramco agreed to buy a stake in MidOcean Energy for $500 million, making its first investment in liquefied natural gas in a bid to diversify beyond its core oil business. Global demand for fuel has surged, especially in Europe, which is replacing reduced gas and oil supplies from Russia.

Asian markets were mostly down last week. Japan’s Nikkei 225 (JP225) fell by 2.03% for the week, China’s FTSE China A50 (CHA50) decreased by 1.45%, Hong Kong’s Hang Seng (HK50) ended the week down by 1.31%, and Australia’s ASX 200 (AU200) ended the week positive by 0.28%.

On Monday, the Bank of Japan said it will conduct additional bond purchases in an effort to slow the rise in yields after benchmark yields hit a decade high.

The central banks of Australia and New Zealand will hold meetings this week. On Tuesday, the Reserve Bank of Australia (RBA) will hold its first meeting under the leadership of Michelle Bullock, the first woman to head the bank. The RBA is expected to leave the rate unchanged, but the RBA will leave the door open for further hikes in order to be flexible. Meanwhile, the Reserve Bank of New Zealand (RBNZ) will hold its policy meeting on Wednesday. Despite the RBNZ’s hawkish stance, market watchers do not expect a rate hike, but the RBNZ may hint at a hike in November.

S&P 500 (F)(US500) 4,288.05 −11.65 (−0.27%)

Dow Jones (US30) 33,507.50 −158.84 (−0.47%)

DAX (DE40)  15,386.58 +63.08 (+0.41%)

FTSE 100 (UK100) 7,608.08 +6.23 (+0.082%)

USD Index  106.17 −0.05 (−0.05%)

• – Japan Tankan Large Manufacturers Index (m/m) at 02:50 (GMT+3);
• – Japan Tankan Large Non-Manufacturers Index (m/m) at 02:50 (GMT+3);
• – Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
• – Switzerland Retail Sales (m/m) at 09:30 (GMT+3);
• – Switzerland Manufacturing PMI (m/m) at 10:30 (GMT+3);
• – German Manufacturing PMI (m/m) at 10:55 (GMT+3);
• – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
• – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
• – Canada Manufacturing PMI (m/m) at 16:30 (GMT+3);
• – US ISM Manufacturing PMI (m/m) at 17:00 (GMT+3);
• – US Fed Chair Powell Speaks (m/m) at 18:00 (GMT+3);
• – US FOMC Member Harker Speaks (m/m) at 18:00 (GMT+3);
• – US FOMC Member Williams Speaks (m/m) at 20:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.