The Week Ahead: Budgets, payrolls and elections

The next two weeks’ feel like they will determine the future direction of risk sentiment and consumer and business confidence for the rest of 2024 and beyond. Event risk is huge, there is a hotly anticipated UK budget this week, in the US, Q3 GDP is released and US payrolls for October are scheduled for release this coming Friday. Next week the US Presidential election takes place on Tuesday, after that there are two key central bank meetings on Thursday 7^th November: the Bank of England and the FOMC meeting in the US, both central banks are expected to cut rates when they meet next week. There are also plenty of earnings reports due. However, stocks have opened the week on a high. This is a reminder that we will soon get clarity about the future of the UK’s tax changes and the outcome of the US election, which is good news for investors.

US economy expected to prove its exceptionalism

US economic data that is scheduled for release this week, will be critical for the next move by the FOMC. Currently there are 24 basis points of rate cuts priced in for next week’s meeting, and the market is convinced that the Fed will cut rates in the immediate aftermath of the election, CME Fedwatch has a 98% probability of a cut. The market is convinced that the US had a stellar Q3, and GDP is expected to expand at a 3% annualized pace last quarter, when it is released on Wednesday. US growth is expected to have been powered by consumption and non-residential investment. However, the question for investors is whether this can be maintained? There is some concern that consumers are running down their savings and spending on credit to maintain purchases. The good news on the US economy could be rudely interrupted on Friday, by the release of the non-farm payrolls. US employment growth is expected to have slowed sharply last month. Economists expect 110k payrolls for October, down from September’s 254k rate. The unemployment rate is expected to remain steady at 4.1%, and average hourly earnings are also expected to remain steady at a 4% YoY growth rate. The market has got used to a strong US economy, and better than expected economic data, thus, we could see a volatile reaction to the US payrolls data later this week, especially for stocks.

However, on the other hand, a weaker payrolls number would virtually confirm a rate cut next week from the Federal Reserve, and it would also increase the chance of further cuts down the line. This could boost the broader US stock market outside of the Magnificent 7. The payrolls report is also big news for the dollar. The dollar index is fading on Monday, perhaps this is a sign that economic event risk this week could weigh on the buck. The dollar is the best performing G10 currency in October. It has made huge gains vs. the JPY, USDJPY is higher by more than 6%. GBP/USD is lower by 2.7%, and EURUSD is down by 2.5% so far in October. This is part of the ‘Trump trade’, thus we may need to wait until we get the outcome of the US election to know where the dollar will go next.

UK budget in focus as UK bond yields rise

In Europe, the UK’s Budget on Wednesday is dominating the outlook for the UK. We have already sent out our preview on this. Tax rises are widely expected, and the Chancellor has already outlined the change to the debt rules. This caused UK Gilt yields to climb to their highest level since early July last week. We doubt that the Chancellor will want to shock the market with this Budget, so there might be limited upside for long term UK yields from here, although the 10-year Gilt yield is higher on Monday. However, all eyes will be on the OBR growth forecasts, to see if her measures are expected to boost the longer-term growth outlook for the UK, while also stabilizing the national debt. The new debt measure, which is called Public Sector net financial liabilities, stood at 82% of GDP at the end of the 2023-2024 financial year. This is an improvement on the near 100% of GDP, measured by public sector net debt, however even public sector net financial liabilities is rising. This means that changing the debt rules is not a magic bullet for the Chancellor, and it will not make the UK’s fiscal challenges disappear.

It is also worth noting that the public sector spending review will not be presented until May next year, so spending plans will not be fleshed out in this report. Overall, we think that this Budget is one of many drivers of UK markets, and it may not be the most powerful. However, there could be an uptick in business and consumer confidence after the Budget is released, as it removes a huge weight of uncertainty from the British public.

Europe’s economic malaise to continue

Elsewhere, Eurozone Q3 GDP could not be more different from the US. Q3 growth is expected to rise by 0.2%, the annualized pace of growth is expected to be 0.8%, up from 0.6% in Q2. This week is expected to show that the US economy is growing at a significantly faster pace than Europe, which is only likely to boost the allure of US stocks further.

However, the euro may get a boost from European CPI, which is released on Thursday. The CPI estimate for October is expected to rise to 1.9% from 1.7% on a YoY basis, the monthly rate is expected to rise by 0.2%, after falling 0.1% in September. EUR/USD is bouncing off last week’s lows below $1.08 and is back above $1.0820 at the start of this week.

UK bond yields start the week on a high note

It is also worth noting that global bond yields are rising on Monday, the 10-year UK Gilt yield is higher by more than 2 basis points and is rising at the fastest pace in Europe. This suggests that there are some market jitters ahead of the Budget. French yields are stable, although Moody’s downgraded the outlook for France’s sovereign debt rating to negative on Friday. It is also worth noting that sovereign bond yields are not reacting to the sharply lower oil price, this suggests that sovereign debt concerns are weighing on the bond market as we start a new week.

The stock market outlook

Even though there is huge event risk coming up, US stocks are still hovering near record highs. Added to this, although there were signs that the stock market rally was broadening out in the US, the Magnificent 7 tech stocks have been pulling away from the rest of the S&P 500 in recent months. This week’s earnings releases will be key to see if this trend continues. On Tuesday, Google will release earnings, on Wednesday Microsoft will release their earnings report and on Thursday it is Apple’s turn. Earnings and profit levels are expected to rise for Google vs. Q2 2024. Revenues are expected to come in at $72.8bn for Q3, while Earnings per Share are expected to be $1.99, compared with $1.89 in Q2. If estimates are correct, then investors will be looking to see if the uplift to revenues and profits were generated by Google’s AI investments. If yes, this could be warmly welcomed by investors. Microsoft is expected to report revenues that are broadly in line with the prior quarter, at $64.5bn and EPS is expected to be a touch higher for last quarter at $3.10. Apple is expected to see a much stronger earnings report versus the prior quarter. It is expected to report earnings per share of $1.57, up from $1.40 in the prior quarter, revenues are expected to be $94.26bn, up from $85.77bn. Could these results show that Apple got its mojo back last quarter? Also, Apple’s results could also reflect economic strength in the US in Q3. The focus may also be on Apple’s sales in China, and whether the stimulus measures announced by the government have filtered through to consumer demand.

The Magnificent 7 dominate once again

The dominance of the Magnificent 7 during this earnings season is huge. In aggregate, the Magnificent 7 is expected to report YoY earnings growth of 18.1% for Q3, according to FactSet. They are propping up the overall S&P 500 index, if you strip out the Magnificent 7, then the overall earnings growth rate for the remaining Mag 7 companies would be 0.1%. With the Magnificent 7 added in, the earnings growth rate for the entire S&P 500 is 3.4%. The market expects the US tech giants to continue to report double digit earnings growth for the next 5 quarters, so there are some big expectations for these companies.

UK earnings: BP to get hit by weaker oil prices

There are also some key earnings releases in the UK this week. On Tuesday we get HSBC and BP and on Wednesday Standard Chartered and GSK are in the spotlight. BP will be watched closely due to the sharp decline in the oil price in recent weeks. In the last three months, the price of Brent crude oil is lower by more than 10%. BP is expected to report weaker revenues for Q3 vs. Q2. The market is expecting revenues of $46.4bn, down from $47.2bn. Earnings per share is expected to be weak for last quarter, as costs weigh on weaker revenues. Analysts expect EPS of $0.12, vs. $0.16 in Q2.

Middle East escalation does not impact oil price

BP and other oil companies are under pressure on Monday, its stock price is down by more than 1.7%, as the oil price tumbles. Israel targeted Iran on Saturday, however, it did not strike oil fields or Iran’s nuclear targets. Iran had a restrained response to the attack, which suggests that the latest escalation in the Middle East is contained for now. The price of oil is down more than 4% on Monday, and Brent crude is trading at $72.70, its lowest level since early October. This suggests that the war-premium is starting to fade, with the focus shifting to over supply for 2025, which could lead to a downside bias for the oil price as we move into the final months of the year.

The decline in the oil price is boosting stocks, and airline stocks in particular. They are leading European stocks higher on Monday. US futures are also pointing to a higher open on Monday, as markets enter the next two weeks that are littered with event risk, in a positive frame of mind.