A fresh record for US stocks as we wait for CPI

US stocks rose to fresh record highs on Wednesday, which has boosted overall market sentiment on Thursday. The S&P 500 and the Dow Jones Industrial index both closed at records on Wednesday. The driver of the gains include optimism ahead of earnings season. Average earnings growth for the S&P 500 has been scaled back in recent weeks, and the growth rate is currently below 5%. However, far from deterring investors, the downgrade to earnings expectations could be perceived as a lower bar for companies in Q3, which may boost the chance of upside earnings surprises.

The gains on the S&P 500 on Wednesday were broad based. Cyclicals did well, as the Atlanta Fed’s GDPNow tool upgraded its growth forecast for Q3 GDP in the US. It now expects Q3 GDP to be 3.2%, which has generated excitement among investors. Cruise liners and General Motors did well, however, the rally was deeper than just pro cyclical stocks. Key tech firms including Super Micro Computers, Palantir Technologies and Cadence also led the S&P 500 higher on Wednesday, and Pfizer was also a top performer.

Boeing was one of the weakest performer’s, its share price fell by more than 3%, as talks between its Union and management collapsed. Boeing workers have been on strike for more than a month, and with no end in sight, the market is concerned about Boeing’s liquidity position. The strike is costing the company $1 bn per month, and combined with safety recalls and concerns, the rate of cash burn for the company in Q3 could extend the more than $4bn recorded in Q2. Boeing is not getting hit by weak demand for its products, its order book is huge, instead domestic concerns are the driver of Boeing’s decline.

The FOMC minutes dovetail nicely with today’s US CPI report, which is the highlight of the economic data calendar on Thursday. The gist of the FOMC minutes were that Jay Powell strong-armed his colleagues into voting for a 50bp rate cut last month, but don’t expect more of the same. There appears to be a bias in the minutes towards cutting rates in smaller increments going forward. In the aftermath of the minutes, the market is expecting an 84% chance of a 25bp rate cut in November, with a 15% chance of no cut.

The market is expecting US CPI for September to moderate to 2.3% from 2.5% in August, the core rate of inflation is expected to remain steady at 3.2%. If there is an upside surprise like there was to payrolls, then we could see a bigger chance of no rate cut from the Fed next month. However, a reading inline with expectations, would suggest that the goldilocks scenario for the US economy carries on, which is good news for both bonds and equities, which could both rally on a sanguine US CPI report later.

Elsewhere, the FX market is once again in focus. The dollar is higher again on Thursday, although it may pause ahead of the CPI print due later. However, the strength of the dollar rebound this month is starting to get some people worried. USD/JPY has jumped by more than 3% since the start of October. This could force the BOJ into hiking rates in December, as the weak yen raises inflation pressure.

The pound is also lower by 1.6% since the start of Q4, and GBP/USD is stuck below $1.31. In the G10 FX space, the dollar is king as we move into Q4. This is to be expected when the US growth rate is much stronger than elsewhere, and until other economies play catch up, then we could see the pound and other G10 currencies struggle.

Hurricane Milton has made landfall in Florida; however, it has not had a massive impact on the oil price, and WTI crude is higher by 0.8% so far on Thursday. The broader impact will not be known until later, but two hurricanes so close together, wreaking billions of dollars in damage, could hit US insurers later today.

Elsewhere, in the UK the focus could be on the housing market. The RICS house price balance survey rose to its highest level since 2022. This is another sign that the UK housing market is picking up as interest rates are falling. However, the detail within the report is interesting. The RICS survey has reported an uptrend in housing in the last few months, however, in September, some sub-indices moderated, including sales expectations, price expectations and new buyer enquiries. New instructions surged, as is typical in September. The pullback in the sub-indices could be a sign that UK consumers are holding back on big ticket purchases like houses until after the budget.

The Budget is also in focus as we have 20 days until Chancellor Reeves announces her first tax and spend decisions. The focus on Thursday is on the change to the government’s fiscal rules, which could unlock £57bn for investment in the UK. These changes include removing BOE transfers from the UK balance sheet, and changing the way that investment is looked at in the Budget. Public sector net worth (the value of the government's investments including the student loan book and the motorway network) could be subtracted from what the government owes, to unlock billions more for investment.

The bad news is that the Institute for Fiscal Studies says that the UK will have to raise £25bn in taxes to meet the government’s spending targets. This could increase the chance of more austerity in the budget, or some unpopular tax increases. When it comes to the UK’s government finances, nothing is simple. The government may give to the public in investment plans, but the chances are high that it will take away with tax increases. The government remains committed to allowing oversight of their budget plans from the OBR and Reeves is likely to remain committed to funding everyday spending and debt interest payments with tax receipts. Thus, the Budget changes are causing more of a storm in the media, and not in financial markets. UK bond yields are moving with global trends, and we do not expect a Truss style market shock on the back of the Budget later this month.