10/21/2024

There is no doubt that the last quarter of the year has been a good one so far. While economic stimulus in China and the future monetary easing by the ECB remain somewhat uncertain, these concerns are balanced by US data, which continues to demonstrate remarkable economic resilience across the Atlantic. September's retail sales, released this week, exemplified this strength.

With the notion of a soft landing and high hopes for a bright future driven by artificial intelligence, global equity markets achieved further weekly gains, with the S&P 500 index reaching historic highs once again. Meanwhile, implied volatility in equity markets, which had remained relatively high since August's turmoil, eased noticeably. At the same time, higher-quality credit spreads fell to their lowest level in nearly two decades. Oil prices dropped sharply following the news that Israel would not attack Iranian nuclear or oil facilities, which in turn led to a downward adjustment in global inflation expectations.

How long will this remarkable calm last? While it might continue, we should remain somewhat skeptical. The U.S. presidential election is just around the corner, and the strong appreciation of the dollar in recent weeks suggests that investors are not entirely overlooking this significant November event. In addition, other important developments are on the horizon, such as the Japanese election next weekend, the anticipated UK budget, and the meetings of China's National People's Congress and Politburo Standing Committee in late October or early November. Therefore, volatility could increase significantly in response to these crucial events or to Israel's yet unknown military response to Iran's missile attack.

Meanwhile, reflecting on last week's events, the anticipated appearance of the Chinese finance minister, where investors hoped to finally hear details and amounts of the announced stimulus, was disappointing as those details were not provided. Later in the week, the Chinese Ministry of Housing announced additional financial support for unfinished housing projects. However, property stocks in China did not respond positively to these announcements, as they are seen as failing to address the structural problems of oversupply.

Overall, expectations for a large-scale fiscal stimulus have diminished, and it seems more likely that any measures eventually introduced will be moderate in scale. Moreover, the language used by officials does not suggest that the stimulus will include direct support for consumption. Although the activity data for September exceeded expectations, it does not fundamentally alter the underlying scenario of China's economy, which is experiencing significant consumer weakness due to economic uncertainty and heavy exposure to the real estate market.

In the realm of central banks, European monetary authorities are beginning to adjust their policies in response to the disappointing economic activity. As anticipated, the European Central Bank implemented its second consecutive 25 basis point cut, following negative surprises in activity and inflation data. However, the forward guidance remains unchanged, indicating no pre-commitment for future meetings. Currently, the consensus expects another cut in December, although there is some speculation that the ECB may accelerate to a 50 basis point cut at that meeting. The flow of incoming macroeconomic data will be crucial in either reinforcing or dismissing this possibility.

Last Thursday, the final September CPI in the Eurozone was revised down to 1.7% year-on-year, and details suggest core services inflation is finally slowing. The Bank of England may also quicken its pace of cuts in response to recent inflation trends and signs of wage moderation.

In contrast, the data released in the United States continue to provide the Federal Reserve with the flexibility to slow down, reducing the pace of rate cuts to 25 basis points in November and potentially skipping some meetings further down the line. September's retail sales indicate that US growth could accelerate in the third quarter to nearly 3.5% on an annualized basis, with a strong carry-over effect into the fourth quarter. Furthermore, these figures reinforce the view that the American consumer remains a key pillar of US growth, supported by fundamentally favorable conditions overall.