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The week ahead holds high stakes as U.S. jobs and manufacturing data will influence the Fed’s next policy moves. While China’s markets will be quiet during the Golden Week holiday, global eyes remain fixed on the broader ripple effects of its recent stimulus.
Meanwhile, oil prices are closely watched as geopolitical tensions in the Middle East add fresh volatility to the market.
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Market Overview
The U.S. stock market painted a mixed yet intriguing picture this week, with the S&P 500 closing up 0.62%, the Dow Jones Industrial Average advancing 0.59%, and the NASDAQ outperforming with a 1.10% gain.
The Russell 2000 lagged, posting a 0.26% decline. The positive performance across the major indices was largely driven by a potent combination of easing U.S. monetary policy and renewed optimism over China’s aggressive stimulus measures.
The tech-heavy NASDAQ benefited particularly from renewed interest in AI stocks and Micron Technology’s promising outlook, while the U.S. consumer confidence index showed a sharp decline.
Several key dynamics were at play behind the numbers. China’s massive fiscal and monetary stimulus package provided a shot in the arm for global markets. Copper prices, often seen as a barometer of global economic health, rebounded, boosting materials equities.
However, mixed U.S. housing data and tepid demand for high-yield bonds, given oversupply, suggest that investors are still navigating choppy waters. Lower inflation readings – particularly the PCE index approaching the Federal Reserve’s 2% target – eased fears of further aggressive rate hikes and supported market sentiment.
Last Week’s Highlights
- Fed Inflation Gauge Nears Target: The core PCE price index rose 0.1% in August, with a YoY increase of 2.2%, close to the Fed’s 2% goal.
- US Consumer Confidence Slumps: The consumer confidence index fell to 98.7 in September from 105.6.
- US Housing Market Weakens: US new home sales fell 4.7% in August, while building permits were revised lower.
- US Refinancing Surges: Refinancing activity hit its highest level since April 2022 as mortgage rates dipped.
- China Launches Massive Stimulus: China cut its reserve requirement ratio by 50 basis points, pushing the CSI 300 up 16.0%.
- UK Private Sector Expands Again: The UK PMI registered 52.9 in September, marking 11 months of continuous expansion.
- Eurozone Business Activity Shrinks: The Eurozone Composite PMI dropped to 48.9 in September, its fourth consecutive monthly decline.
- German Business Confidence Falls: Germany’s Ifo index dropped to 85.4, adding to fears of a recession as business sentiment weakens.
- Sweden and Switzerland Cut Rates: Both central banks lowered rates by 25 basis points, with Sweden at 3.25% and Switzerland at 1.00%.
- Japan Elects Hawkish Prime Minister: Shigeru Ishiba became Japan’s new prime minister, raising expectations for monetary policy tightening.
- Australia’s Inflation Slows: Australia’s CPI rose by 2.7% YoY in August, down from 3.5% in July, indicating easing inflation pressures.
- US Treasury Yields Hold Steady: The 10-year Treasury yield held steady versus strong demand for municipal and corporate bonds.
- Oil Prices Decline: Crude oil fell 4.0% to $68.18 due to easing supply concerns from Libya and tempered demand expectations from China.
- Gold Hits New Record High: Gold prices reached a fresh weekly high of $2,670, driven by market uncertainty and falling bond yields.
Week Ahead & Implications
Fed Set for More Rate Cuts as Jobs and Manufacturing Struggle
Next week’s release of the US jobs report and ISM Manufacturing PMI will be critical in shaping the Fed’s policy outlook. Expectations point to a continued slowdown in the labor market, with consensus anticipating 145k new jobs and the unemployment rate holding at 4.2%.
However, sources like Capital Economics suggest that job growth may weaken further, with payroll gains potentially averaging only 100k per month by year-end.
Hiring expectations are decreasing, and if this trend continues, it could push the unemployment rate closer to 5%, increasing pressure on the Fed to deliver additional rate cuts.
On the manufacturing front, the ISM Manufacturing PMI is forecasted to tick up slightly to 47.3, still well below the 50-point mark that signals growth, suggesting the sector will remain in contraction.
The chart below underscores this continued weakness: while global liquidity conditions are easing, and financial conditions (blue line) are improving, world manufacturing PMI (white line) has yet to recover meaningfully, remaining stuck in negative territory.
This global PMI softness mirrors the pressures in the US manufacturing sector, where new orders and employment have sharply declined. With no signs of recovery in the upcoming ISM report and continued economic cooling in both jobs and manufacturing, the Fed is likely on track for further rate cuts to sustain growth.
China’s Stimulus and PMI: Short-Term Boost, Post-Holiday Uncertainty
China’s recent stimulus measures, including liquidity injections and cash handouts equal to 3% of GDP, sparked a dramatic market reaction last week.
As shown in the chart below, Chinese stocks surged, which illustrates that Chinese equities, including the HSTECH and CSI 300 indices, are now the most overbought they’ve been in “modern history.” Commodities like copper rallied as investors positioned for a potential recovery.
However, the upcoming PMI data, with NBS expected at 49.5 (still in contraction) and Caixin at 50.5 (barely in expansion), suggests the manufacturing sector remains under pressure despite these policy efforts.
While this stimulus has provided a short-term boost, Goldman Sachs and ING analysts caution that deeper structural issues, particularly in real estate, remain unresolved.
With Chinese markets closing after Monday for the Golden Week holiday, the immediate response to further data or policy shifts may be delayed, leading to lower liquidity and trading volumes globally.
The market has already moved sharply, as evidenced by the overbought conditions in Chinese stocks, but the question now is whether the rally can sustain momentum after the holiday or if it fades as fundamental challenges reassert themselves
Geopolitical Risks and OPEC+: Oil Supply Volatility Ahead
The oil market faces heightened volatility as geopolitical tensions in the Middle East and shifting OPEC+ strategies dominate the landscape. Israel’s ongoing conflict with Hezbollah, with the possibility of a ground invasion in Lebanon, threatens to disrupt vital oil flows from the region, adding near-term volatility to oil prices.
At the same time, OPEC+ remains in focus, as reports suggest Saudi Arabia may be ready to abandon its unofficial $100/bbl target to regain market share. This and the potential for increased oil output from OPEC+ in December point to growing supply pressure.
While these geopolitical risks may cause short-term price spikes, the medium-term outlook remains bearish. The chart below shows Brent oil prices (blue line) falling amid demand concerns and expectations of oversupply.
Meanwhile, the U.S. 10-year Treasury yield (white line) has mostly trended downward, reflecting softening economic growth and inflation expectations. Lower yields typically indicate weaker economic conditions, dampening oil demand.
This correlation between declining yields and falling oil prices underscores the bearish medium-term forecast despite the potential for short-term geopolitical volatility.
Eurozone Risks: Rising French Yields and Inflation Divergence
The Eurozone faces increasing fiscal risk, particularly in France, where bond yields are nearing levels higher than those of peripheral countries like Spain and Italy.
This unusual dynamic is driven by worsening French debt and deficit issues, leading foreign investors, including Japan, to reduce their exposure to French bonds. As French yields rise, inflation in the Eurozone has also shown signs of easing.
Recent data from France and Spain suggests that headline inflation could fall below the ECB’s 2% target for the first time since 2021, driven by lower energy prices. However, core inflation remains stubbornly high, complicating the ECB’s decision on rate cuts.
The chart below illustrates how European companies exposed to China are trading at a fair price compared to the broader market.
Despite market expectations of an imminent rate cut, the ECB could hold rates steady in the near term, waiting for more evident signs of economic stability.
Investors should be cautious about overpricing potential ECB easing, especially as the fiscal pressures in France create additional volatility in European bond markets.
Liquidity-Driven Rally: Tech and Broader Market Rotation in Focus
The liquidity-driven rally has been a significant force behind the surge in tech stocks, but recent developments suggest investors should remain cautious. While companies like Nvidia have been key beneficiaries, its pullback late last week highlights the potential volatility in the sector, especially as liquidity conditions shift.
October is historically a more volatile month, and some investors are already hedging against potential downside risk in tech.
The chart below highlights the MSCI World Price-to-Earnings (P/E) ratio, which shows how global equity valuations have been hovering near their highest levels since 2020.
This reflects the broader liquidity-driven rally across international markets, with tech stocks being the largest beneficiaries.
However, this elevated P/E level signals potential caution for investors, as higher valuations can make markets more vulnerable to corrections, particularly if liquidity conditions tighten.
Beyond tech, there is increasing focus on sectors like materials, industrials, and emerging markets, where investors are rotating capital in search of opportunities.
The Chinese stimulus has bolstered demand expectations for industrial metals, but any delay in follow-through from Beijing could dampen the rally. Meanwhile, international and emerging markets are beginning to attract attention as investors look for undervalued areas outside of U.S. tech.
This broadening focus signals that while tech remains in the spotlight, liquidity is starting to flow into other sectors, potentially driving a more diversified market rally in the weeks ahead.
Most Impactful Events to Watch Next Week
