Weekly house view | Powell's soft pivot

Financial markets switched to risk-on mode last week, as a dovish pivot from the Federal Reserve and a big slowdown in US job creation fuelled expectations that US interest rates have peaked. The Fed left rates unchanged and Chair Jay Powell signalled that a hike in December was possible but unlikely. That message puts the focus squarely on inflation and labour market reports before the Fed’s 12-13 December meeting to determine its policy path. Friday’s employment report showed non-farm payrolls rose by 150,000 in October, below expectations for 180,000 and down from the revised figure of 297,000 for September. The Treasury Department set the stage for the week with an updated refunding strategy which will see it skew issuance more towards T-Bills, easing pressure on longer-dated issuance. Together, the Treasury announcement, Fed pivot and jobs data delivered a triple jolt to markets, pushing down the 10-year Treasury yield by 27 bps to 4.57%. US equities duly rallied in their strongest week this year.  Earnings reports have shown resilient margins but mixed top lines and downward revisions to 2024 earnings estimates. Markets could rally further before year-end if volatility in rates eases, for which US consumer price data on 14 November will be key. We favour high-quality investment grade bonds, which offer attractive yields.

In the UK, the Bank of England left its policy rate unchanged at 5.25% for the second time in a row but said “it is much too early to be thinking about rate cuts." By contrast, Brazil’s central bank cut its key rate by 50bps to 12.25%. We are positive emerging market local currency debt. In Europe, a shipping giant said it plans to cut 10,000 jobs, reflecting a sluggish outlook for container trade. Euro area GDP fell by 0.1% quarter-on-quarter in Q3, while the Q2 figure was revised up to +0.2% (from +0.1%). The GDP data were marked by downside surprises in Italy and Portugal. Moody’s, which rates Rome just one notch above junk, will review Italy’s debt rating in mid-November. In positive news, gas storage in Europe has reached its physical limit ahead of the winter.

In Asia, the yen fell to a near 33-year low despite the Bank of Japan took another step towards removing its so-called yield curve control (YCC) policy by turning the upper bound of 1.0% from a “hard cap” to a "reference“. The move is a step towards exiting Japan’s ultra-loose monetary policy. On the fiscal front, Japanese Prime Minister Fumio Kishida announced a stimulus package worth USD113 bn aimed mostly at households. We are positive on Japanese equities. In China, PMI data showed the manufacturing sector tipped back into contraction in October. We expect more Chinese stimulus measures in the coming months.