Global Economy & Markets, Weekly Roundup 14/10/24
US Q3:2024 corporate earnings began on a positive note, with equity valuations at the top of their long-term range
The US earnings season kicked off in the past week with JP Morgan, Wells Fargo and Blackrock beating consensus expectations. The earnings season will pick up pace this week when circa 9% of S&P500 companies are due to report. S&P500 EPS annual growth is expected at +5% in Q3, from +13% in Q2, while full year 2024 EPS are expected to climb by +10% year-over-year ($242).
Regarding valuations, the S&P500 12-month forward price to earnings ratio of 21.4x stands elevated at the 89th percentile of valuations since 1990 (median P/E of 15.7x) following price gains of +22% year-to-date, whereas valuation divergence among regions remains wide. Better-than-expected economic data and a dovish pivot by the Fed supported equity prices, albeit geopolitical risks and the prospect of trade frictions post US Elections (November 5th) will keep a lid on short-term upside.
The headline US CPI decelerated for a sixth consecutive month in September, standing at a 3½-year low of +2.4% yoy (+3.7% yoy in September 2023). The stickiness of the core CPI index (+0.1 pp to +3.3% yoy) suggests that the Fed will proceed with a gradual 25 bps per meeting pace of interest rate cuts by year-end.
The weekly data for US initial jobless claims unexpectedly increased by +33k to 258k for the week ending October 5th versus consensus estimates for 230k. The rise spurred some concerns on whether a deterioration in labor market conditions could be underway.
The ECB is expected to lower interest rates by 25 bps to 3.25% (Deposit Facility Rate). Euro area inflation appearing en route to undershoot ECB’s projections conducted back in September (for 2.6% yoy on average in Q4) and the subdued impetus for economic activity provide the ground for such a decision on Thursday. Policy interest rates need to follow inflation lower.
In France, the new government introduced a draft Budget for 2025, which includes a raft of spending cuts and tax increases amounting to €60 bn or 2.3% of 2023 GDP to stem the widening budget deficit (expected: -6.1% of GDP in 2024). Debt dynamics are not favorable. Indeed, the ratio of France’s public debt to GDP is expected at c.110% in 2024 from 98.1% in Q4:2019. Recall that Fitch Ratings affirmed France’s sovereign credit rating at AA-, revising though the outlook to negative from stable previously (Moody’s: Aa2, S&P Global: AA-).
Due to political and fiscal uncertainty, French equities have underperformed their euro area peers by a wide margin year-to-date (CAC40: +0.5% vs Eurostoxx50: +10.7%), while sovereign bond spreads have averaged 72 bps in H2:2024, so far, versus 52 bps in H1.
Finally, in China, high expectations had been built up ahead of a Press conference from the chairman of China's National Development and Reform Commission Zheng Shanjie during the past week. Mr.Shanjie adhered to a raft of actions to support economic activity being on the cards, albeit stopping short from announcing specific stimulus measures, an unwelcome development by investors. Note that the annual growth of real GDP is expected (due on Friday) at +4.5% in Q3:2024 from +4.7% in Q2:2024 and +5.3% in Q1:2024.
The US earnings season kicked off in the past week with JP Morgan, Wells Fargo and Blackrock beating consensus expectations. The earnings season will pick up pace this week when circa 9% of S&P500 companies are due to report. S&P500 EPS annual growth is expected at +5% in Q3, from +13% in Q2, while full year 2024 EPS are expected to climb by +10% year-over-year ($242).
Regarding valuations, the S&P500 12-month forward price to earnings ratio of 21.4x stands elevated at the 89th percentile of valuations since 1990 (median P/E of 15.7x) following price gains of +22% year-to-date, whereas valuation divergence among regions remains wide. Better-than-expected economic data and a dovish pivot by the Fed supported equity prices, albeit geopolitical risks and the prospect of trade frictions post US Elections (November 5th) will keep a lid on short-term upside.
The headline US CPI decelerated for a sixth consecutive month in September, standing at a 3½-year low of +2.4% yoy (+3.7% yoy in September 2023). The stickiness of the core CPI index (+0.1 pp to +3.3% yoy) suggests that the Fed will proceed with a gradual 25 bps per meeting pace of interest rate cuts by year-end.
The weekly data for US initial jobless claims unexpectedly increased by +33k to 258k for the week ending October 5th versus consensus estimates for 230k. The rise spurred some concerns on whether a deterioration in labor market conditions could be underway.
The ECB is expected to lower interest rates by 25 bps to 3.25% (Deposit Facility Rate). Euro area inflation appearing en route to undershoot ECB’s projections conducted back in September (for 2.6% yoy on average in Q4) and the subdued impetus for economic activity provide the ground for such a decision on Thursday. Policy interest rates need to follow inflation lower.
In France, the new government introduced a draft Budget for 2025, which includes a raft of spending cuts and tax increases amounting to €60 bn or 2.3% of 2023 GDP to stem the widening budget deficit (expected: -6.1% of GDP in 2024). Debt dynamics are not favorable. Indeed, the ratio of France’s public debt to GDP is expected at c.110% in 2024 from 98.1% in Q4:2019. Recall that Fitch Ratings affirmed France’s sovereign credit rating at AA-, revising though the outlook to negative from stable previously (Moody’s: Aa2, S&P Global: AA-).
Due to political and fiscal uncertainty, French equities have underperformed their euro area peers by a wide margin year-to-date (CAC40: +0.5% vs Eurostoxx50: +10.7%), while sovereign bond spreads have averaged 72 bps in H2:2024, so far, versus 52 bps in H1.
Finally, in China, high expectations had been built up ahead of a Press conference from the chairman of China's National Development and Reform Commission Zheng Shanjie during the past week. Mr.Shanjie adhered to a raft of actions to support economic activity being on the cards, albeit stopping short from announcing specific stimulus measures, an unwelcome development by investors. Note that the annual growth of real GDP is expected (due on Friday) at +4.5% in Q3:2024 from +4.7% in Q2:2024 and +5.3% in Q1:2024.