Weekly house view | Rates rethink

The week in review

US manufacturing continued to contract in September, but a nonfarm payrolls report for last month that was much stronger than expected helped the S&P 500 eke out a 0.3% gain on the week. Together with the jump in oil prices, the jobs data sent bond yields higher as market participants scurried to revise their bets on further big rate cuts from the Fed, hurting the performance of US small-cap stocks. The more interest-rate sensitive short end of the US Treasury curve sold off more than the longer end while the jump in US Treasury yields helped boost the USD last week. The greenback gained against all major currencies, especially the yen, as Japan’s new prime minister signalled opposition to further near-term rate hikes by the Bank of Japan. Chinese equities continued their rally on stimulus expectations, bringing Asian equities higher along with them. Although yields rose, European government bonds fared better than Treasuries as weak inflation data pointed to another ECB rate increase this month.

Geopolitics

Geopolitical tensions in the Middle East are supportive of oil prices despite Saudi Arabia’s intention to defend its market share by increasing production.

Key data

Nonfarm payrolls rose 254,000 in September, far more than expected, while US employers added 72,000 more jobs in the previous two months than initially estimated. The unemployment rate ticked down to 4.1% from 4.2% while average hourly earnings grew by an annual 4.0% in September, up from 3.8% in August. The ISM purchasing managers’ index for manufacturing held steady at 47.2 in September, remaining in contraction for the sixth month in a row, while the Services ISM index improved to 54.9 from 51.5.

Consumer inflation in the euro area slowed to an annual rate of 1.8% in September from 2.2% in August. Swiss inflation hit a 3-year low.

In China, the official purchasing managers index (PMI) for manufacturing for September came in at 49.8, up slightly from August, but the alternative Caixin PMI slid by 1.1 points to 49.3 in September.