RECAPPING LAST WEEK

U.S. equity indices and other risk assets soared after Donald Trump was re-elected as President and the Federal Reserve cut interest rates for a second straight meeting. The Russell 2000 index exploded higher by 8.5%, while the Nasdaq Composite jumped 5.7%. The S&P500 gained 4.6%,eclipsing the $6,000 level for the first time. Bitcoin surged 11% as investors anticipated a more favorable regulatory environment for digital currencies. Multiple S&P500 sectors posted gains of more than 5%, including consumer discretionary, technology, energy, and industrials. Crude oil prices rose 1.5% after OPEC+ pushed back its planned December production increase by one month.

U.S. Treasury yields and the dollar initially jumped following the election results. The 10- year note rate reached a four-month high near 4.5% as bond traders weighed what could become a more complex economic landscape under the new administration. However, yields later backed off after the Fed lowered rates by 25 basis points, with Chair Powell stating that risks to the labor market and inflation were “roughly in balance.” Odds for an additional rate cut in December fell slightly, from 75-80% before the election to near 60% at week’s end, based on fed funds futures. In other news, consumer confidence improved in early November, while one-year inflation
expectations edged down to 2.6% from 2.7%.

However, other data, along with concerns over potential tariffs and government borrowing to fund tax cuts, clouded the inflation outlook. U.S. productivity increased moderately in the third quarter, but wage pressures persisted. Unit labor costs rose 1.9% after a 2.4% expansion in Q2. ISM services PMI advanced to 56 last month, with the prices paid component still running hot despite a slight decrease. Overseas, China unveiled a 10 trillion-yuan ($1.4T) debt package on Friday. More stimulus may be on the way in reaction to escalating trade risks after the U.S. election results.  

Chinese stocks fell sharply as some viewed the measures as not direct enough to support domestic growth. However, the country’s current trade balance saw a big boost in October as exports jumped 12.7% YoY. Moving to global central bank news, the Bank of England cut rates by 25 basis points while raising its inflation forecast. The outlook for future policy was less clear following the Labour government’s budget announcement that stoked fiscal expansion fears. Australia’s central bank held rates steady, saying it may be some time until inflation reaches its target range. Finally, a collapse in Germany’s ruling alliance cast further uncertainty on Europe’s largest economy. Chancellor Scholz may face a vote of no confidence in January after firing his coalition-party finance minister.

THE WEEK AHEAD

This week starts off quietly as the U.S. bond market is closed today in observance of Veterans Day. Investors will continue to assess the implications of the federal elections, including which partyends up controlling the House of Representatives. Potentially the most critical issue is how quickly and to what extent tariffs would be enacted once Trump takes office, and what will the FOMC’s
policy reaction look like.

Meanwhile, the key domestic data for this week includes the monthly CPI and retail sales reports. Inflation levels are expected to remain near the prior readings, while retail sales are forecast to remain solid. Expect more color from FOMC members on the events of last week as many will have public appearances, including Chair Powell on Thursday. Industrial production figures and the Empire State Manufacturing index round out the U.S. calendar.

On the international side, China’s industrial production, retail sales, and fixed asset investment will be released on Thursday evening. All are expected to receive a boost from recent stimulus measures. The Bank of Japan’s Summary of Opinions from its October meeting may provide hints on when the next rate hike will come. Last of all, there are GDP updates from the UK, Eurozone, and Japan.

(source: Schwab)