Markets and Economy
What does France’s election mean for markets?
The second half got off to a fast start as markets absorbed some important data for the Federal Reserve and the first round of legislative elections in France.
The Israel-Hamas War has shocked the world and brought geopolitical risk to the forefront of global conversation.
The September “dot plot” from the Federal Open Market Committee triggered fears that the US Federal Reserve would keep interest rates “higher for longer.”
China’s “Golden Week” holiday — which usually sees a strong boost in tourism spending — saw better but less-than-expected results, underscoring China’s uneven economic recovery.
When I wrote my commentary last week, we were breathing a sigh of relief because the United States was able to avoid a government shutdown. But today, the near-shutdown is far in the rearview mirror — the Israel-Hamas War has shocked the world and brought geopolitical risk to the forefront of the global conversation.
Over the weekend, Hamas launched a surprise attack on Israel, killing civilians and taking hostages, in what seems to be a reaction to the Israel-Saudi peace plan that is in the works. Israel has declared war and appears to be preparing for a wide-scale invasion of Gaza. Part of the Israel-Saudi peace deal was a pre-condition of Israeli concessions to Palestinians. This seems unlikely to happen in the current environment, which suggests the peace deal may be derailed. The Wall Street Journal has reported that Iran was involved in Hamas’ attack; if this is confirmed, that risks other countries being pulled into the conflict.
There are many possible ways this crisis can evolve from here, but for the purposes of simplicity, I would suggest two possible paths for macro/market observers to consider: 1) the situation remains contained, or 2) other countries join the conflict.
Now Treasury yields could rise if we see a significant resurgence in inflation caused by the events in the Middle East, but it seems unlikely that we would see a major impact to global inflation. First, the real price of oil is already elevated, and it is hard to imagine anything like a tripling from today’s level (in 1973, prior to the Yom Kippur War, West Texas Intermediate oil was around $28 a barrel in today’s prices1), the global economy is far less oil intensive than it was at that time, suggesting the inflationary impact of any oil price rise is now proportionately less.
In other news, the further rise of long bond yields is also worrying investors. The September “dot plot” from the Federal Open Market Committee (FOMC) triggered fears that the US Federal Reserve would keep interest rates “higher for longer,” which in turn placed upward pressure on long bond yields. Recent better-than-expected US economic data has added to that upward pressure on yields, resulting in downward pressure on stocks.
However, as I have said before, it appears markets are overreacting to the dot plot and the data. That’s because:
Finally, I take comfort from comments made by San Francisco Fed President Mary Daly last week. She conceded to the reality that the rise in the 10-year US Treasury yield is doing the Fed’s work for it, which suggests the Fed can now be more dovish: "the need for us to take further action is diminished because financial markets are already moving in that direction and they've done the work. We don't need to do it more."4
Investors are also concerned about the health of various economies in the face of a global central bank-induced slowdown:
Looking ahead, some of the most-watched data points this week will be the US Consumer Price Index (CPI), German industrial production, and German CPI. I will also be interested in the FOMC minutes, which will be released later this week.
Date |
Report |
What it tells us |
---|---|---|
Oct. 9 |
German Industrial Production |
Indicates the economic health of the industrial sector. |
Oct. 11 |
Minutes from September FOMC meeting |
Gives further insight into the FOMC’s decision-making process. |
Oct. 11 |
German CPI |
Tracks the path of inflation. |
Oct. 12 |
US CPI |
Tracks the path of inflation. |
With contributions from Brian Levitt and Paul Jackson
Sources: Global Financial Data, Refinitiv Datastream, and Invesco Global Market Strategy Office
Source: US Bureau of Labor Statistics, Oct. 6, 2023
Source: Statistics Canada, Oct. 6, 2023
Source: Reuters, “Fed officials largely sanguine about rise in US bond yields,” Oct. 5, 2023
Source: S&P Global/HCOB PMI Surveys, Oct. 2 and Oct. 4, 2023
Source: CNBC, “China’s domestic tourism is finally back to pre-pandemic levels,” Oct. 9, 2023
Source: The Wall Street Journal, “China’s Economy Likely to Slow in 2024 as Headwinds Persist, World Bank Says,” Oct. 2, 2023
What does France’s election mean for markets?
The second half got off to a fast start as markets absorbed some important data for the Federal Reserve and the first round of legislative elections in France.
Mixed economic data raises questions in US and around the world
As data reports deliver mixed messages on the US economy and the US deficit rises, signs across the globe show diverging central banks and the potential for rising prices.
As global economies diverge, where are the investment opportunities?
Central banks are on different timelines for rate cuts, political uncertainty is leading to divergence within Europe, and emerging market elections have shown different preferences among voters.
Important information
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Header image: Doug Armand / Getty
Some references are US centric and may not apply to Canada.
All figures are in US dollars.
Past performance is not a guarantee of future results.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector.
Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest. show less
Disinflation, a slowing in the rate of price inflation, describes instances when the inflation rate has reduced marginally over the short term.
The Federal Reserve’s “dot plot” is a chart that the central bank uses to illustrate its outlook for the path of interest rates.
The Eurozone (also known as the euro area or euroland) is an economic and monetary union of 18 European Union member states that have adopted the euro (€) as their common currency.
The federal funds rate is the rate at which banks lend balances to each other overnight.
Inflation is the rate at which the general price level for goods and services is increasing.
Tightening monetary policy includes actions by a central bank to curb inflation.
The Federal Open Market Committee (FOMC) is a 12-member committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
PMI (formerly Purchasing Managers Index), a commonly cited indicator of the manufacturing sectors’ economic health, is calculated by the Institute of Supply Management.
The Institute of Supply Management (ISM) non-manufacturing survey is an economic index based on surveys of non-manufacturing (or services) firms' purchasing and supply executives.
The ADP National Employment Report measures nonfarm private payrolls. It is published monthly in collaboration with Moody’s Analytics.
West Texas Intermediate (WTI) is a type of light, sweet crude oil.
OPEC+ refers to the 13 members of the Organization of Petroleum Exporting Countries (OPEC) and 10 other oil-exporting non-OPEC members.
A basis point is one hundredth of a percentage point.
The opinions referenced above are those of the author as of October 9, 2023. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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