US Presidential Election jitters impacted buyer demand for riskier assets, with little separating Kamala Harris and Donald Trump. In the bond market, 10-Year Treasury yields reflected market unease, reaching a mid-week peak of 4.260% before ending the week at 4.242% (+0.157 bps). Higher yields affected market risk sentiment.
However, expectations of Fed rate cuts in November and December cushioned the downside for the Dow and the S&P 500. According to the CME FedWatch Tool, the chances of a 25-basis point November Fed rate cut increased from 90.4% (October 18) to 95.4% (October 25). Furthermore, the probability of a 25-basis point December Fed rate cut stood at 75.3%.
On Thursday, US economic indicators bolstered expectations for a soft US economic landing. The S&P Global Services PMI unexpectedly increased from 55.2 in September to 55.3 in October. Accounting for almost 80% of the US economy, a pickup in new orders and activity was crucial. Meanwhile, softer service sector inflation fueled speculation about multiple Q4 2024 Fed rate cuts.
US labor market data also supported hopes for a soft landing. Initial jobless claims fell from 242k (week ending October 12) to 227k (week ending October 19). Upbeat employment figures are crucial, with private consumption accounting for over 60% of GDP.
Early in the week, the People's Bank of China (PBoC) cut 1-year and 5-year loan prime rates (LPR) by 25 basis points. Markets reacted positively to the move as lower borrowing costs could drive credit demand and consumption. Additionally, the PBoC conducted its first operation of the Securities, Funds, and Insurance Companies Swap Facility (SFISF), boosting demand for China-linked equities.
The PBoC's policy maneuvers fanned hopes for consumer-targeted stimulus measures from Beijing. However, the IMF's latest growth projections, released on Tuesday, October 22, called for caution. The IMF lowered China's 2024 growth forecast from 5.0% to 4.8%. Commenting on China's policy measures, the IMF stated that Beijing's maneuvers may not be enough to support an economic recovery.
Natixis economist Alicia Garcia-Herrero commented on Beijing's policy measures, stating,