November started almost in a frenzy in the markets. Last week’s news stream included just the right amount of relatively weak economic data, soft inflation figures and predictably light central bank talk, propelling the downbeat markets into a sharp rise.
Last week, equities rose by several per cent globally, including on the Helsinki stock exchange, which has long shown weaker performance. The appreciation of the euro against the US dollar slightly reduced returns on USD-denominated investments for euro investors. Interest rates fell clearly and credit spreads decreased.
The Japanese market also performed well last week. The Bank of Japan announced earlier in the week that it would partly abandon its yield curve control which, for example, has meant keeping the 10-year yield at a maximum of one per cent. The markets received the announcement favourably and the yen weakened slightly, forcing the central bank to intervene in the markets immediately by purchasing bonds.
Europe’s inflation figures were somewhat lower than expected, falling below three per cent for the first time since July 2021. The slowdown in inflation was mainly driven by a clear year-on-year fall in energy prices. Core inflation, i.e. inflation less energy and food prices, is still over four per cent, however.
The right kind of disappointment in the USA
In the USA, economic data overall fell short of expectations. Weak industrial PMIs and especially a weaker-than-expected employment report finally suggested signs of a slowdown in the US economy which had been on the verge of overheating. The comprehensive economic data package was just negative enough to mitigate inflationary pressures but not too negative to ruin market sentiment.
Economic growth expectations for the next quarter in the USA have significantly declined compared to the previous quarter. While economic growth was expected to be more than 5 per cent in the last quarter, the expectation is only just over one per cent as we approach the end of the year. The anticipated renaissance of the industrial sector also fell through: order intake was lower than expected and the growth curve that had taken an upward turn in the previous months started to slope strongly downward.
The job creation rate also continued to decrease. The labour markets that showed strong development after the Covid years have declined steadily, and October saw the creation of “just” 150,000 jobs against 336,000 in September. The unemployment rate rose somewhat and stood at 3.9 per cent.
The US central bank, Federal Reserve, decided to keep the policy rate intact in its interest rate meeting. Fed Chair Jay Powell explained that since the financing conditions are tight due to, for example, higher interest rates, a stronger dollar and a rise in equities, there is currently no need for interest rate hikes. If the tight fiscal environment is expected to remedy the inflation problem “naturally” and interest rates are cut after that, there is a risk that inflation will start galloping again in the longer term.
Earnings season coming to a close
The earnings season is coming to a close and the majority of companies have reported their earnings in Europe and the USA. The reports published by European companies have been a disappointment in terms of both sales and earnings. Although expectations were low, the realised earnings were almost seven per cent lower than anticipated. The best performers in Europe have been financial sector companies, with earnings up by 21 per cent from the last quarter.
In the USA, the earnings season has not offered any great surprises. Earnings have grown around 7.6 per cent in relation to expectations. Apple reported higher earnings but its stock price fell because the company’s net sales continued to decline. The majority of the key companies have now reported their earnings, except for some, including NVIDIA.
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