Bonds yields fall as US inflation rises
Although last Wednesday’s hotter-than-expected US Consumer Price Index (CPI) inflation reading initially pushed US government yields higher (meaning their prices fell), by later in the week, broader investor worries centred around the AI buildout had triggered a ‘flight to safety’ with investors seeking out safe-haven assets. The move saw both US government bonds (Treasuries) and UK gilts rally to outperform declining global stock market indices.
Data released last week showed US inflation jumped from 3.4% in August to 3.7% in September. Much of the rise was due to the spiralling fuel costs triggered by the war on Iran. Core inflation, which strips out volatile food and energy prices, came in at 2.6% (up from 2.4%). Both readings were ahead of economists’ forecasts.
A day later, the impact of rising fuel costs was seen in the latest US Producer Price Index (PPI), or ‘factory gate inflation’, reading. It jumped 1.3% in September to be up 6.3% annually.
Mild surprise: UK economic growth slows but beats expectations
UK GDP delivered a modest 0.1% uptick in August, despite expectations of a small decline. Following several months of stronger growth, the UK economy decelerated in August but still beat market forecasts due to an unexpected boost in the production sector. While UK production grew 0.8%, services, the largest slice of the economy, was flat with construction declining slightly. August’s small gain took three-month GDP growth to 0.7%.
Although this will come as welcome news for Chancellor John Healey, the figures don't include September's surging energy prices and government bond (gilt) yields. The latter will further add to government borrowing costs, as will an expected rate hike from the Bank of England next month. This will further reduce the chancellor's dwindling fiscal headroom at the coming UK Budget on 28 October.
With no talk of spending cuts, this leaves UK households braced for another round of tax increases to meet the growing cost of both spending and borrowing.
‘Big Six’ US banks open third quarter earnings season
Last week the ‘Big Six’ Wall Street banks sounded the starting gun for the third quarter US reporting season. Their results are considered to be a bellwether for the earnings season that lies ahead.
JPMorgan, the world’s biggest bank, posted earnings growth of 6%, which fell short of expectations. Meanwhile, both Goldman Sachs and Citigroup blew past expectations with profit growth of 29% and 17%, respectively. Morgan Stanley also beat expectations with a 6.5% rise in quarterly profits. All four reported robust equity trading revenues even as fixed-income trading suffered, partly as a result of the recent US rate hike. Elsewhere, Wells Fargo shares retreated on disappointing revenues while Bank of America trailed its peers due to disappointing earnings that were further impacted by a $1.2bn money laundering fine.
FactSet is estimating a 29% rise in the earnings of S&P 500 Index companies for the third quarter.
