Market Watch: October 6

Following the release of U.S. employment figures, market sentiment shifted towards expectations of another U.S. Federal Reserve rate hike, leading to a decline in equity futures. North American markets diverged for the week, with U.S. markets reversing earlier losses following Friday’s jobs report. In contrast, Canadian markets couldn’t reverse Friday’s losses, closing lower for the week. Despite price-supportive news, markets closely tracked oil prices lower as Saudi Arabia reiterated its plan to keep a 1m barrel per day (bpd) cut in place and an unexpectedly large 4.2 m barrel drop in U.S. crude inventories.

Highlights:

U.S. markets closed 0.52% higher for the week, led by gains in the tech sector, even after the release of stronger-than-expectedU.S. jobs data and a spike in Treasury yields.

Canadian markets declined -1.47% for the week alongside energy prices even as September’s employment report came in three times higher than median consensus estimates and unemployment remained unchanged.

European stocks were -1.51% lower for the week, unable to shake off losses after the strong U.S. jobs report.

Emerging market equities closed -1.27% lower as a risk off sentiment permeated markets.

Knee-jerk reaction to jobs report causes spike in bond yields

U.S. Treasury yields spiked on Friday following a better-than-expected nonfarm payrolls reading. The benchmark 10-year Treasury yield is back to its 16-year high, and the curve continued to steepen as long-end bonds underperform. The sell-off in Treasurys has jolted everything from the stock market to the real estate market as investors recalibrate amid surging yields. Should the Treasury market continue on this track, it is set to post its third consecutive annual loss, which has never occurred before. Credit spreads remained soft amid the risk-off sentiment.

Highlights:

Credit spreads have widened to June levels for investment grade (IG) and high yield (HY) debt. The average IG coupon increased to 6.0% in September as the cost of capital has steadily risen this year. Average maturity has also increased, currently at 9.3 years,up from 8.2 years a month ago.

Primary issuance slowed with just $9.0 bn USD in investment grade deals priced well below the projected $15.0 bn USD.

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The global week behind

Canadian factory PMI falls to three-year low as weak market demand weighs

Canada’s manufacturing sector downturn deepened in September to its lowest level since shortly after the start of the pandemic, as weak market demand weighed on production and new orders. The data seemed to add support to the Bank of Canada’s recent decision to hold its main policy rate unchanged. The Canadian central bank held its key interest rate at 5% in September, noting that the economy had entered a period of weaker growth.

Highlights:

The S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) fell to a seasonally adjusted 47.5 in September, its lowest level since May 2020, from 48.0 in August.
The output index fell to its lowest level since August 2022 at 45.6 from 47.7 in August. The new orders measure was at 46.9, also down from 47.7 the previous month, while the employment index showed staffing levels declining for a fifth straight month.
Purchasing activity was cut as firms focused on reducing excess inventory at their plants. Signs that cost pressures were stabilizing provided some encouragement, with the input price index dipping to 50.4 from 53.9 in August.

U.S. hiring accelerated with 336,000 jobs added last month

U.S. hiring surged last month, the latest sign of a resilient U.S. economy that has contributed to the recent bond market rout. U.S.Labor Department reported employers added 336,000 jobs in September, the strongest gain since January and up sharply from the prior month’s upwardly revised 227,000 gain. Accelerating job growth has signalled an economic rebound in recent months, after the labour market slowed in the first half of the year.

Highlights:

The unemployment rate held steady at 3.8% last month.
Employers raised pay at a solid pace as they competed for a limited pool of workers. Average hourly earnings rose 4.2% in September from a year earlier, down slightly from 4.3% in August.
Firms in leisure and hospitality stepped up their hiring, with employment at restaurants and bars returning to pre-pandemic levels. Hospitals, nursing homes and truckers also added jobs last month.

China’s economy likely to slow in 2024 as headwinds persist, World Bank says

China’s economy is likely to slow next year due to continued domestic headwinds, the World Bank said in a report, cutting its growth projection for the country. Factors such as the fading rebound from the reopening of the economy, its huge debt and the weakness of its property sector will weigh on growth in China, the World Bank said in its semi-annual outlook for the East Asia and Pacific region.

Highlights:

The World Bank cut its 2024 forecast for China’s gross domestic product growth to 4.4% from 4.8% while maintaining its 2023 gross domestic product (GDP) growth forecast at 5.1%.
Economic growth in the East Asia and Pacific region is also slowing faster than projected. The region’s GDP growth is projected at 5.0% in 2023 and 4.5% in 2024. That compares with prior forecasts of 5.1% and 4.8%, respectively.
Key external factors affecting the region include slowing global growth and tight financial conditions. Among domestic factors are the legacy of increased public and private debt and the macroeconomic policy stance.

In the news: Russia lifts ban on diesel exports

Russia announced on Friday that it had lifted a ban on pipeline diesel exports via ports, removing almost all restrictions. Rising diesel prices, driven by supply problems and geopolitical tensions, have significantly impacted global inflation due to its use in trucking,shipping, industrial machinery, and agricultural equipment. Diesel prices also affect derivative products such as heating oil and jet fuel, among other things. Businesses facing increased fuel costs have passed them onto consumers, leading to higher prices for groceries and other goods. Concerns remain however that Russia could once again try to use energy exports as a geopolitical tool as they continue to reduce crude supplies as part of a pact with OPEC+ members to push prices higher.

Behind the headline:

Supply issues, rather than increased demand, were the primary cause of higher prices. Russia is one of the largest exporters of diesel fuel, selling around 1m bpd, or ~3.0% of global trade.
The move triggered a sell-off in diesel markets, with prices in Europe falling ~3.0% as fears over a winter shortage eased.
Higher energy prices leading to increased costs have the potential to pressure central banks to raise interest rates or keep them higher for longer.

The global week ahead

The Global Week Ahead will be available Tuesday, October 10.

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Market Watch: October 6

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