Stronger US Retail Sales figures for the month of September createdsome confusion regarding how markets should react. The figures came in at 0.7%,above the 0.3% expected and just shy of the 0.8% rise recorded in August. Onthe one hand, the positive result was evidence that the US economy is provingto be more robust than expected. But on the other hand, ongoing resilience ofthe world’s largest economy means that the FOMC needs to stay on their toesregarding interest rates, therefore further tightening remains a distinctpossibility.
In reaction to the data, stocks on Wall Street were mixed with the major US indices providing no clear direction for Asian markets to follow on Wednesday. However, in the bond market, yields resumed their ascent, with the 10-year note hitting 4.84%. Based on rising treasury market yields, the bond market is more convinced than the stock market that interest rates could go higher from here. Time will tell which market has the better read on what the FOMC will do in coming months regarding interest rate policy.
In the FX market, the DXY (Dollar Index) reacted in indifferent fashion to the retail sales figures, with the level holding steady around the 106.30 level. Elsewhere in the currency space, the AUDUSD pushed higher on mildly hawkish RBA Meeting Minutes, with the central bank keeping the option for further tightening well and truly on the table for future meetings should inflation remain stubborn.
Meanwhile the USDJPY remains perilously close to the much-watched 150 level, with everyone waiting for signs that the authorities in Japan could step in to support the struggling yen. Overall, the USD remains in favour on the currency market, with rising yields and solid macro data supporting the case for greenback strength.
Gold has regained its form over the last week on safe haven play due to conflict in the Middle East. The precious metal is trading below the US$1930 level, and if there are any signs that the Israel-Hamas conflict could spread or escalate this could see more buyers adding gold to their portfolios if risk aversion rises. In the last 24 hours gold has been consolidating gains, with the move higher in bond yields limiting further gains in the gold price.
The other big focus at the moment is Q3 corporate earnings season in the US. The bar has been set quite low regarding expectations, and so far, more than 80% of companies in the S&P500 have beaten forecasts. Nonetheless, if this trend continues, it will add to the ‘soft landing’ narrative for the US economy. But let’s see how the rest of the earnings season plays out as we assess how the corporate sector is navigating the current era of high interest rates.
Upcoming earnings results from Tesla and Netflix this week will be closely monitored, while investors will also be keeping an eye on developments in the Middle East. And of course, bond yields will remain of high interest to traders, particularly as we approach the next FOMC meeting in early November. These aforementioned factors shape as potential drivers of market sentiment for the remainder of the week.