Just keep moving down the bumpy road

That was not much of a month for bond or equity investors here or across the pond. US treasuries fell as the odds of Trump returning to office increased, and UK gilts fell as the market reacted to the increase in borrowing requirements after the budget on Wednesday. There did not appear to be any asset class that took comfort from Wednesday’s Budget announcement as equities, bonds, and the pound all fell in subsequent days. The market fears that taxing and borrowing will not lead to the forecast economic growth but will make it harder for the Bank of England to cut interest rates, possibly leading to dreaded stagflation.

The US equity market finished the month on a very downbeat note, influenced by earnings reports while continuing to digest the macroeconomic data. Many of the Mag 7 reports this week had mixed outcomes; the reaction from investors to the numbers hinged mainly on the returns these companies are starting to see or otherwise from their massive investment into AI. Despite another strong quarter, Microsoft shares fell as AI sales did not meet expectations, and the company remained committed to its AI capital expenditure. Meta also fell, as they explained that losses from AI will continue. Apple sold off after its earnings, whilst Amazon rose, as did Alphabet (despite the Russian courts fining them for more than all the money in the world), highlighting the varied reactions to these reports. At the end of the month, developed markets were in negative territory. The Vix fear index spiked to its highest level in 3 weeks but did not suggest panic as yet anyway.

Analysts believe that the latest US macro data continues to support the soft landing scenario. The personal-consumption expenditures price index rose 0.2% in September and 2.1% from a year earlier, the smallest annual increase since early 2021, compared with 2.3% in the year through August. Despite this improvement, some economists still question whether the inflation battle has been completely won, as they delve deeper into the details. On the jobs front, applications for unemployment benefits fell last week to their lowest since May. US GDP  increased at a 2.8% annual rate in the third quarter, adjusted for seasonality and inflation, the Commerce Department said Wednesday. Slightly below the previous quarter but continues the streak of strong economic growth for the economy. Consumer spending continues to be an engine of growth, and BCA would argue that the well will soon start to run dry.

There was also some good news from Europe this week after better-than-expected growth. Economic activity in the 20-nation currency bloc rose 0.4%, surpassing economists’ expectations.

Next week, we will get a new US president, a new leader of the Tories and probably another cut in US interest rates.