UK reaction: Some volatility at play, but broader pressures are easing | AXA IM

Today’s CPI data all but seal the deal for an additional cut to Bank Rate at November’s Bank of England meeting. The headline rate dropped to cyclical low of 1.7% - markets had anticipated a drop to 1.9% - from 2.2%, reflecting a broad-based slowdown across goods and services. Indeed, CPI goods inflation dropped to -1.4% in September, from -0.9%, while services CPI inflation dropped to 4.9% – over a two-year low – from 5.6% August. Core CPI inflation slowed by more than expected as a result, to 3.2%, from 3.6%.

UK reaction: Looser labour market conditions point to further cut | AXA IM

The latest labour market data point to an additional cut at the Bank of England’s meeting in November. The Labour Force Survey data showed a chunky 373K increase in employment in the three months to August and the unemployment rate edged down again to 4.0%, lower than in the previous three months and the level this time last year. Ongoing sampling issues, however, mean the data are unreliable and should be taken with a large pinch of salt. Note the survey reached an average of 88.5K individuals with a response rate to 42.8% (around 38k respondents), whereas in H1 2024, those figures were 53.1K and 17.6% (around 9k respondents), respectively.

Forget the market noise: Focus on value and the long-term | AXA IM

Sometimes it seems the economics profession operates in a parallel universe. There are confident forecasts for economic growth, inflation, and interest rates - which with hindsight, have a more than mixed track record.

The First Cut is the Deepest | AXA IM

The French government’s budget bill for 2025 pledges a discretionary effort of 1.4% of GDP. This is a serious amount, the largest effort over the Medium Term Fiscal and Structural Plan (MTFSP) for 2025-2028. Front-loading the measures, rather than pledging future virtue, is always preferable, especially when political conditions are fragile. When simply looking at how the ratios of spending and tax to GDP are forecasted in the government’s bill, a majority of the effort comes from higher tax. As we argued two weeks ago, given the fragile state of domestic demand, such choice is understandable in the short run. The issue – highlighted for instance by Fitch when they decided to put a “negative outlook” on their rating of France – is that many measures in the 2025 bill are temporary. Now that the government has delivered an “emergency budget”, it will need to sketch out a programme of more systemic measures, probably focusing on the spending side given the already high level of taxation.

China reaction: Prices soften, fiscal measures lack numbers | AXA IM

China's Consumer Price Index (CPI) inflation slipped to 0.4% yoy in September, down from 0.6% in August and falling short of the market expectation of 0.6%. On a monthly basis, headline CPI dropped further to 0% from 0.4% in August. Prices generally weakened across the board in September, except for food prices, which rose by 3.3% yoy, up from 2.8% in August. Additionally, extreme weather conditions, particularly in China’s major farming regions, drove a sharp 12.1% month-on-month (mom) increase in vegetable prices. However, this spike in food prices was not enough to offset the broader downward pressure on headline inflation – and indeed may have added to depressed prices elsewhere.

Solid returns appear set to continue | AXA IM

The bond rally is over for now as expectations for the path of US interest rates are once again being reset. This is mostly in response to the September US employment report being stronger than expected where 254,000 jobs were created against an expectation of 150,000, while the unemployment rate fell back to 4.1% from 4.2% in August. It goes without saying that no-one, least of all the Fed, should respond to one piece of data but the employment report did allow the market to introduce a little more realism regarding future rate cuts. Some have criticised the Fed for cutting rates by 50bp on 18 September. This is unfair and the Fed never indicated it would continue to ease by 50bp moves. The reality is that real short-term interest rates are quite high and potentially restrictive and the economy is on track for a soft landing. The moving three-month average of payroll numbers suggests a year-on-year growth rate of employment of around 1.2%. This is reasonable but it is below what has tended to be the growth rate of jobs in the US outside of recessionary periods. The soft-landing scenario remains largely unchallenged.

UK reaction: Renewed growth in the UK, but momentum is firmly weaker than in H1 | AXA IM

The latest activity data showed the UK returned to growth in August, which will be somewhat of a relief to the Bank of England after two consecutive months of stagnation. GDP showed a month-to-month increase of 0.2% in August, in line with ours and markets’ expectations, on the back of strength in the manufacturing and construction sectors. The overall picture, though, is that momentum is easing. Indeed, on a three-month-on-three-month basis, growth slowed to just 0.2% in August, compared to downwardly-revised 0.3% in July. And over Q3, it is on track to post 0.2%, compared to 0.5% in Q2. Note we had always expected a slowdown in H2 now that much of the payback growth from H2 2023 and supply-side improvements has faded.

US reaction: Core inflation sticky again, but eclipsed by jobless claims | AXA IM

US CPI inflation came in above consensus for September, the headline rate easing to 2.4% from 2.5% in August, but firmer than the expected 2.3% (a 0.2% monthly gain compared to a 0.1% expected). Core inflation reported its second consecutive above consensus report, rising on the month by 0.3% - the same as last month (0.31% vs 0.28% unrounded)  – compared to expectations for 0.2%. The core annual rate of inflation edged higher to 3.3%, back to its June level – although still a 3-year low before that.   

Finanzas en 2 minutos: La inflación de la zona euro cae por debajo del objetivo y los mercados bursátiles cierran septiembre con fuerza | AXA IM

Los índices S&P 500 y Dow Jones volvieron a anotarse máximos históricos la semana pasada al cerrar un excelente tercer trimestre para los mercados estadounidenses. El lunes, el presidente de la Reserva Federal (Fed), Jerome Powell, repitió su predicción de que eran probables otros dos recortes de tipos este año «si la economía se comporta según lo previsto». En lo que va de año, el S&P 500 ha subido un 21%, mientras que el Dow Jones se ha anotado un 13%. Entretanto, el índice bursátil chino CSI 300 registró su mayor subida en un día desde 2008, ya que los inversores siguieron asimilando el paquete de medidas de estímulo anunciado recientemente por su Gobierno. Sin embargo, la escalada de las tensiones en Oriente Medio lastró la confianza de los mercados: en la semana transcurrida hasta el cierre del jueves, el índice MSCI World se dejó un 1%.1

Best Laid Plans Go Awry | AXA IM

While they both converted to “restriction removal”, it seemed until last week that the Fed and the ECB had laid out different plans, the Fed opting for a decisive, pre-emptive path, while the ECB was choosing a more prudent, data dependent and meeting-by-meeting approach. Yet, the employment report released last week provided more evidence that the softening of the US economy is proceeding at a glacial pace, while Christine Lagarde’s latest testimony at the European parliament expresses a readiness to engage in back-to-back cuts, the Governing Council – even its hawkish wing – getting more concerned about the deterioration of the real economy. 

ECB update: Cautiously surfing the dovish wave | AXA IM

The September flash inflation print highlighted significant downside to ECB’s forecasts unveiled just a few weeks before. Crucially, core inflation came at 2.7% y/y in Q3 24 while ECB’s forecasts revised in September had 2.9% y/y. Given the surprise came from core components, the downside is likely to transpire at least through a few quarters. In our reaction to the print, we thought it was enough for the ECB to decide on 25bps rate cut in October (no rate cut expected previously at that meeting), also since President Lagarde expressed increased confidence in the timely return of inflation to target in her statement at the European Parliament. Such comments were also echoed by historically hawkish ECB board member Isabel Schnabel, while she also highlighted growth headwinds and softening labour demand, making clear the lack of willingness to fight market pricing which had over 90% probability a 25bps rate cut at the next meeting.

Shaken, not stirred | AXA IM

The quarter just ended was an incredibly good one for fixed income investors. A ranking of quarterly total returns for bond indices provided by ICE/Bank of America shows that Q3 2024 was the second strongest quarter of 49 quarterly observations since Q3 2012. For global credit it was the third best quarter and for US high yield it was the fourth best. It was only the third quarter since the Federal Reserve started to tighten policy that US Treasuries outperformed cash – and the same for European government bonds against euro cash returns. The 12-month return ending September 2024 was the best 12-month period for global credit (investment grade) returns over that same period.