A Good Year-End On The Cards?
Last week ended on an optimistic note thanks to a stronger-than-expected gain in job creations.
On Wednesday, the Fed’s rate cut (for the third time this year) and message supported equities. On Friday, newsflow surrounding the US-China trade negotiations turned positive again. Over the week, the S&P500 index gained 1.5% and registered another all-time high on Friday. Meanwhile, 10-year Treasury yields closed at 1.72%. The Stoxx Europe 600 index, which had appreciated more sharply in the previous week, gained only 0.36% over the week.
USA: more job creations than expected
The US economy created 128,000 jobs in October, and the September figure was revised up to 180,000. The unemployment rate rose from 3.5% (lowest level since 1969) to 3.6% and wages rose by 3% year-on-year.
In the third quarter, US growth decelerated to 1.9% year-on-year versus the economists' consensus of 1.6%. It was mainly business investment that fell while consumer spending slowed, albeit much less sharply. Residential investment, boosted by two rate cuts, seems to be picking up well.
The ISM manufacturing (purchasing managers) index contracted more than expected in October but, for the first time in 7 months, improved versus the previous month. Indeed, it rose from 47.8 to 48.3 and thus remains in a contraction zone (below 50).
Same scenario in Europe, but not in China
In Europe too, third quarter GDP growth came in above consensus. Manufacturing PMI (purchasing managers) indices in France and Italy surprised positively while in Germany it remained very low albeit showing a slight improvement.
In China, on the other hand, the official PMI for the manufacturing sector fell for the sixth month in a row to 49.3 and the PMI for services is still in a growth zone at 52.8, but at an all-time low since 2016. A trade agreement would therefore be very welcome.
The Fed's message was very well received
The jobs report was published just after the Fed cut rates last Wednesday. It reinforces the message of a monetary policy that is now ‘in a good place’ and that neither a cut nor an increase is expected soon. This cements the scenario that the US economy is likely to remain resilient thanks to consumer purchasing power. The recovery in the housing sector should also (somewhat) offset the effect of the global slowdown.
What are the conclusions?
The American economy is likely to make a soft landing thanks to rate cuts and improving financial conditions. The jobs report comforts the view that there will be no recession in 2020.
Third quarter corporate earnings have surprised positively, so far, albeit against very low forecasts. These results have led to large swings in some stocks, but the market reaction is positive overall, not just in the US. We had expected cautious or even negative company guidance given that analysts’ earnings estimates for 2020 still seem too optimistic in view of the economic backdrop. But companies are expecting a better fourth quarter. Earnings per share (EPS) forecasts for 2020 are still expected to grow (closer to 5% than the 10% forecast for the MSCI World ACI index), which should support stocks.
In our view, equities still have upside potential as long as hopes of a truce in the trade war materialise.