Weekly house view | Unsustainable fiscal path

Consumer resilience and tightening financial conditions are battling to determine the course of the US economy, and a bumper round of earnings reports this week will help shed light on which is prevailing. The triannual Survey of Consumer Finance showed households net worth rose by 37% from 2019 to 2022, the strongest three-year growth since the data began in 1989. On the other hand, Federal Reserve Chair Jay Powell noted that bond markets are producing tighter financial conditions, and said the US fiscal path is unsustainable. A rise in the US federal budget deficit to USD1.7 trn in fiscal 2023 from USD1.37 trn a year earlier is adding to a concerning fiscal backdrop for markets. The mounting fiscal concerns and expectations the Fed will keep interest rates elevated helped drive the 10-year Treasury yield 30 basis points higher on the week to 4.93%, drawing investors away from equities. We expect the Fed to keep rates on hold at its November meeting. Interest-rate sensitive areas of the economy are hurting, with existing home sales hitting a 13-year low in September. The S&P 500 fell 2.4%ⁱ (in USD) last week but volatility in equities remains lower than in fixed income despite geopolitical uncertainty. As reporting season picks up, the earnings revisions breadth – the number of stocks seeing upgrades versus downgrades – for the S&P 500 has fallen. This week, a clutch of big tech companies report third quarter earnings and we will be watching guidance into 2024, as well as purchasing managers’ and consumer price data.

In Europe, draft budgets point to the phasing out of pandemic and energy shock-related support measures, which means a moderately restrictive fiscal stance in 2024. On monetary policy, the European Central Bank meets this week and we expect it to keep rates on hold. European equities also fell last week, hit by concerns about a wider Middle East conflict, rising government bond yields and disappointing earnings. The Swiss franc – a safe haven currency – hit its highest level since 2015 in a blow to Swiss exporters. Switzerland moved to the right in national elections on Sunday. Another safe heaven asset is gold, which rose 2.5% last week and which we like over the medium-term as a protection against geopolitical tensions. In oil, the US eased sanctions on Venezuela while Iran called for an embargo on Israel. We maintain our year-end target of USD95 a barrel for Brent.

In China, third quarter GDP growth came stronger than expected at 4.9% year-on-year. Most indicators for September continued to improve, and we are keeping our full-year growth estimate at 5.2%. However, the recovery is uneven, marked by persistent weakness in the housing market, meriting further policy stimulus. The key issue for corporate profitability is for nominal GDP growth to be back above real growth again. This should take place in coming quarters.