Weekly house view | Retail sales for direction

US retail sales data and results from some big retailers will take centre stage for markets this week as investors look for signals to continue a selective rally. A benign reading on consumer price data on Tuesday and strong retail numbers could help continue the rally, which has excluded small caps and bonds. The price data will help markets see whether the Federal Reserve is on track with its mission to control inflation. Last week, several Fed officials said the job was not done – once again rowing back on Chair Jay Powell’s message of the prior week, which was more dovish. Powell himself said last week the Fed would not hesitate to hike interest rates if needed. The messaging, and weak demand at a 30-year Treasury auction, combined to push up the 10-year Treasury yield by 8 bps on the week. Showing concern about US fiscal deficits, Moody's changed the US government's ratings outlook to "negative" from "stable". The rise in equities over the last three weeks could suggest some easing in financial conditions despite the Fed saying that markets are doing the central bank’s job for it. However, the Fed’s loan officer survey highlighted deteriorating lending conditions for small firms, which have a large share of their borrowing in floating rates. The Russell 2000 index of small caps duly fell 3%ⁱ (in USD) last week while S&P 500 rose 1.3%ⁱⁱ (in USD). Third quarter earnings showed the lowest proportion of guidance upgrades since the first quarter of 2020. We favour high-quality investment grade bonds.

In Europe, the German government agreed a package of measures – worth up to 28bn euros by 2028 – to support industry, aiming to address a loss of competitiveness due to high electricity prices. On monetary policy, President Christine Lagarde said the European Central Bank will not start cutting rates for at least “the next couple of quarters”. As in the US, European bond yields rebounded slightly. In the Middle East, Israel’s agreement to small pauses in its military operation in Gaza brought a slight easing in tensions, with oil down 4% on the week and gold down 2.6%. The success of a post-conflict peace deal will be crucial for the region. We are overweight gold given solid official demand and as a way to maintain portfolio protection over the medium term.

In China, exports fell by 6.4% in USD terms from a year earlier in October but imports rose 3.0% on demand for energy and materials. Price data showed China slipped back into deflation last month, pulled down by falling food prices. Chinese equities fell by 1.5% over the week. Chinese industrial production and retail sales data this week will be important to assess the recovery.