Rate Cuts in Europe and Strong U.S. Retail Sales Boost Market Sentiment
Week Ending October 18, 2024
Welcome to this week's global macroeconomic roundup! 🌍 Markets reacted positively to rate cuts from the European Central Bank, signaling a potential shift in monetary policy. In the U.S., stronger-than-expected retail sales and renewed excitement in tech stocks, driven by AI optimism, fueled market gains. Let's dive into how these events are impacting the economic outlook across major regions.
🔍 Takeaway
This week's macroeconomic landscape was marked by central banks easing rates, consumer spending strength in the U.S., and mixed economic signals across the globe. China's continued stimulus efforts aimed to mitigate deflationary risks, while Europe's monetary easing offered a potential boost for growth.
United States: Retail sales grew by 0.4% in September, beating expectations and reflecting consumer resilience. Market sentiment was buoyed by tech gains, particularly in AI-related stocks. Despite mixed industrial production data, optimism lifted equity indices across the board.
International: Rate cuts from the European Central Bank indicate a dovish shift amid signs of easing inflation pressures. Meanwhile, Japan and the UK both saw inflation fall, further opening the door for potential monetary easing, which could support equity markets.
Emerging Markets: China's economy expanded at a slower-than-targeted 4.6%, but stimulus measures and better-than-expected industrial production helped lift sentiment. Retail sales showed improvement, although the country faces ongoing deflationary pressure.
⭐️ Post of the week
This week, we’re exploring how machine learning (ML) is making it easier to predict where the economy is headed. Recent research by Philippe Goulet Coulombe and his team shows how ML tools can help us understand the economy better.
Here are some key points:
More Accurate Predictions: The study found that using advanced ML techniques can help make better predictions about things like industrial production and unemployment, especially during uncertain times. Machine learning’s ability to handle complex data makes it a powerful tool for seeing the big picture.
Keep It Simple: Surprisingly, the researchers discovered that simple methods for organizing data often work just as well as more complex ones. This means that even with all the ML tools available, starting with the basics is still important.
Choosing the Right Model: The study also showed that using flexible methods to select the right ML model (like cross-validation) can work just as well as traditional methods. This means ML gives us more options for improving forecasts.
🔍 Takeaway: Machine learning is helping us see the future of the economy more clearly, especially during volatile periods. For investors, understanding these economic trends could be the key to making smarter decisions.
Link to the paper: https://lnkd.in/dQNS_EQ5
Source: Ivan Blanco - LinkedIn
💼 Market Indicators
SPY Performance
Performance and Valuations by Region
Source: MSCI
Momentum performance by Style
Source: MSCI
S&P 500 Earnings Per Share
Source: Yardeni Research
🇺🇸 United States: Consumer Spending Lifts Market Sentiment
Retail Sales: Retail sales grew by 0.4% in September, beating expectations and signaling robust consumer activity. Ten out of thirteen categories reported growth, driving optimism for Q3 economic growth.
Treasury Market: U.S. Treasury yields fluctuated as intermediate- and long-term yields fell after news of declining housing starts, reflecting mixed signals for bond investors.
Stock Market: The S&P 500 rose, with strong performances from utilities and real estate sectors. AI-driven optimism also boosted the Nasdaq as companies like Netflix reported better-than-expected earnings.
🌐 International: Rate Cuts and Easing Inflation Across Europe
🇨🇦 Canada:
Inflation: The inflation rate dropped to 1.6%, well below expectations, marking the second month below the Bank of Canada's target. This strengthens the case for continued rate cuts.
🇪🇺 Euro Area
ECB Policy: The European Central Bank cut rates for the second consecutive meeting, bringing the key deposit rate to 3.25%. This is the first back-to-back rate cut in over a decade.
Inflation: Eurozone inflation was revised down to 1.7%, below the ECB’s 2% target, supporting further easing measures.
🇬🇧 United Kingdom
Inflation: The annual inflation rate fell to 1.7%, the lowest since April 2021, driven by sharp declines in transport costs, especially airfares and motor fuel.
Wage Growth: Wage growth slowed to 4.9% from 5.1%, signaling less pressure on the Bank of England to maintain higher rates.
🇯🇵 Japan
Inflation: The core inflation rate dropped to 2.4%, easing for the first time in five months as government subsidies helped lower energy prices.
Exports: Exports fell by 1.7%, reflecting weaker demand from China, while imports rose slightly due to a weaker yen, impacting trade balance negatively.
🌏 Emerging Markets: Divergent Economic Paths
🇨🇳 China:
Economic Growth: China's GDP expanded by 4.6% in Q3, slightly below target, but signs of improvement in industrial production and retail sales lifted sentiment.
Inflation: Inflation cooled to 0.4%, increasing deflation risks, prompting the central bank to introduce more supportive measures.
🇮🇳 India:
Inflation: Inflation jumped to 5.49% in September, mainly due to rising food costs, surpassing the RBI’s target and delaying anticipated rate cuts.
Food Prices: Vegetables and pulses drove food inflation to 9.24%, putting pressure on households and consumer spending.
🇰🇷 South Korea:
Unemployment: The unemployment rate ticked up slightly to 2.5%, while the number of employed individuals rose, signaling resilience in the labor market.
Stay tuned for next week's updates! Feel free to share your thoughts or questions below.