US durable goods ahead, as markets start to recover

The FTSE 100 has enjoyed tentative gains at the open, pushing higher in anticipation of a UK budget that finally draws the line under a period of great uncertainty and concern for businesses and workers alike. The chancellor has already drip fed some of the giveaways, with the minimum wage hiked by 4.1%. It isn’t a great start for those hoping this budget would be less inflationary than her last. After all, the annual CPI figure remains distorted by April’s 1.2% surge as the energy price cap hike coincided with policy measures of higher minimum wage and NI contributions for businesses. Nonetheless, with Reeves promising to bring down the cost of living, there is a hope that this time around we will see some relief to household expenses through reduced green taxes on electricity. From a wider perspective, the recent decline in UK GDP (-0.1%), Rightmove house prices (-1.8%), and retail sales (-1.1%) signal an economy that has withered away under the cloud of uncertainty. There is a hope that today will mark the beginning of a new phase where that uncertainty gives way to a more expansive phase where lower yields and a BoE rate cut overshadow concerns around the impact of today’s tax hikes.

Traders are becoming increasingly focused on Japan as a major region of potential volatility and growth. Government plans to embark upon a $135bn stimulus plan have raised concerns, sparking a fresh surge in bond yields. That in turn creates a potential problem for those in the US, with the crucial Japan demand likely to dry up if the rate differentials continue to narrow. Talk of the carry trade blowing up has caused major volatility in the past, but we are yet to get to a point where it spooks markets despite yields rising to multi-decade highs. Meanwhile, with reports growing around a potential rate hike from the BoJ in December, we could yet see further upside for bond yields in the weeks ahead. Those looking for potential sources of volatility will do well looking at the impact rising bond yields could have if the carry trade unwinds and cheap borrowing in Japan unwinds the flow of money into global markets.

Today provides a fresh look at the US economy, with a raft of data headed up by the latest core durable goods orders reading. US futures are signalling another move higher at the open, with markets seemingly taking a more constructive tone after a volatile week just gone. Michael Burry’s claims of financial manipulation in the tech space have largely faded as a story, and we have seen the likes of Apple and Alphabet shares hit a record high this week. Nvidia shares thankfully managed to regain half of the 6% decline seen in early trade yesterday, with claims that Meta will buy their AI chips from Google raising concerns over their dominance in the space. Notably, yesterday’s gains centred less on the tech names, with healthcare, consumer cyclicals, and consumer defensives heading up the gains. With earnings season largely behind us, it is worthwhile noting that we have been a bumper 11.3% growth in earnings for the S&P 493, highlighting the strength of US stocks despite recent economic concerns.