U.S. bond yields rose amid pre-election instability; small-cap stocks outperformed large-caps, the dollar weakened, oil prices fell, and Bitcoin experienced a slight decline.

U.S. bond yields have surged, likely driven by the growing instability in the lead-up to the election. Since the Federal Reserve's 50 bp rate cut on September 18, the 10-year U.S. government bond yield has risen approximately 70 basis points. This increase reflects market expectations of persistent inflation.

In equity markets, all major indexes posted negative returns except for the Russell 2000. Small-cap stocks showed a modest 0.02% increase, while large-cap stocks declined by over 1%. Small caps continue to trade at a discount, with valuations considerably lower than those of large-cap stocks. Notably, the “Magnificent 7” stocks saw gains exceeding 3%, primarily driven by Amazon's strong performance.

The U.S. dollar weakened against the euro, falling to 0.91991, following weak employment data. In commodities, WTI crude oil prices dropped by 3.29%, impacted by a reduction in Middle East geopolitical risk and potential oversupply linked to sluggish demand. Gold prices edged down slightly, while in the cryptocurrency market, Bitcoin saw a minor decline of 0.31%.

The U.S. economy grew 2.8% in Q3, driven by strong consumer spending and government investment. However, only 12k jobs were added, indicating challenges in the job market. Manufacturing continued to decline, leading to expected Fed rate cuts.

In Q3, the U.S. economy grew at an annualized rate of 2.8%, driven by strong consumer spending, which rose by 3.7%, and solid business investments. However, residential investment decreased by 5.1% due to high mortgage rates. Government defence spending increased significantly by 14.9%, providing additional economic support. The Fed is anticipated to implement rate cuts as growth is expected to slow to around 1.5% by 2025, with core PCE rising to 2.7%. The October employment report showed only 12k new jobs added, primarily from government hiring, resulting in a stable unemployment rate of 4.1%. Additionally, manufacturing activity continued to decline for the seventh consecutive month, as indicated by a PMI of 46.5, reflecting ongoing challenges in the sector and reinforcing expectations for future Fed rate cuts.

The U.S. economy grew 2.8% in Q3, driven by strong consumer spending and investment. The Fed is likely to pursue rate cuts.

In Q3, the U.S. economy expanded at a solid annualized rate of 2.8%, fuelled by strong consumer spending, robust business investments, and an increase in government defence expenditures. This performance slightly exceeded market forecasts, signalling resilient economic momentum despite global challenges. Consumer spending—a major growth driver—climbed 3.7%, including a 6% rise in goods purchases, underscoring ongoing demand in the retail sector. Non-residential investment increased 3.3%, mainly due to an 11.1% rise in equipment spending, though elevated mortgage rates and affordability issues contributed to a 5.1% decline in residential investment. Government spending provided additional support, with a significant 14.9% boost in defence outlays, while net trade and inventories slightly reduced the headline growth figures.

The outlook points to a “soft landing” scenario, with a cooling labour market expected to moderate economic momentum, reducing growth to around 1.5% by 2025. Meanwhile, the core PCE deflator edged up to an annualized 2.2%, slightly above expectations but down from the prior 2.8%, reflecting ongoing inflationary pressures. This trend may lead the Fed to pursue modest rate cuts, gradually bringing monetary policy closer to a neutral position as it aims to balance price stability with sustained economic growth.

We anticipate a slowdown in growth during the Q4. Additionally, we expect the Fed to implement two further rate cuts, each by 25 bp.

September's personal income and spending report aligns with Fed targets, showing core PCE increases and resilient spending amid ongoing inflation pressures.

The recent personal income and spending report aligns with the Federal Reserve's inflation targets, revealing no significant surprises following the GDP release. In September, the core PCE deflator—the Fed’s preferred inflation measure—increased by 0.256% MoM, marking the highest monthly rise in five months. This places the YoY core PCE at 2.7%, slightly above the anticipated 2.6% and consistent with August’s rate. The annualized rates for the past three and six months remain steady at 2.3%. Meanwhile, the headline PCE saw a MoM increase of 0.18%, resulting in a YoY rate decline to 2.1%, the lowest level since February 2021. This indicates a cooling trend, supported by the annualized rates of 1.8% and 1.7% over the past three and six months, respectively.

The month-over-month momentum in inflation can be partly attributed to rebounding goods prices, which had previously experienced deflation, while service inflation remains sticky. The Supercore PCE, excluding shelter services, reported a 0.32% MoM rise, maintaining its YoY rate at 3.2%. Although it may take time for service inflation to cool, the data aligns with expectations, showing no significant deviations from established trends. Personal income rose by 0.3% in September, as projected, while personal spending exceeded expectations with a 0.5% MoM increase, indicating economic resilience amid prolonged credit tightening.

We anticipate a 25 bp cut next week, which will move rates closer to neutral and provide the economy with the necessary breathing room to sustain growth. While we also expect an additional 25 bp reduction in December, we do not foresee a more aggressive 50 bp cut as the market anticipates.

October’s employment report shows a stark slowdown with only 12k jobs added, a stable 4.1% unemployment rate, and reliance on government hiring to offset private sector contraction, reinforcing expectations for imminent Fed rate cuts.

The October employment report underscores a marked slowdown in job creation, with a net gain of only 12k positions, well below the forecasted 100k, alongside downward revisions totalling 112k for August and September. Significant strike activity—most notably the Boeing strike, which alone reduced employment by 33k—contributed to a 46k-job decline in the manufacturing sector, while hurricane-related disruptions added complexity to data collection. Meanwhile, the unemployment rate held steady at 4.1%, and average hourly earnings rose by 0.4% MoM and 4.1% YoY, indicating moderate wage growth in the context of easing inflationary pressures. A critical contributor to overall employment stability was government hiring, which added 40k jobs in October. Notably, state government positions accounted for 18k of these gains. In contrast, private sector payrolls contracted by 28k, with sharp declines in temporary employment (-49k) and a modest dip in leisure and hospitality (-4k), underscoring a significant reliance on public sector hiring to offset private sector softness.

These trends indicate a deepening divergence between public and private sector employment dynamics, with government hiring providing a stabilizing counterbalance to a decelerating private sector. The moderation in inflationary pressures, combined with slowing job growth, strengthens the case for a more accommodative Fed policy stance. Aligning with weaker employment signals from private surveys, the Fed is widely anticipated to implement a 25 bp rate cut at its next meeting, potentially followed by an additional 25 bp reduction in December. Structural changes in the labour market continue to raise concerns, as employment gains shift increasingly toward part-time, lower-wage roles. Year-over-year data reflects a 0.3% decline in full-time employment against a 1.2% increase in part-time positions, highlighting the Fed’s need to carefully calibrate policy in response to a labour market that is becoming more dependent on government employment to offset private sector weaknesses.

We anticipate consecutive 25 bp Fed rate cuts in both November and December, driven by a weakening labour market and moderating inflation. Additionally, we think that, due to ongoing survey weakness and slower hiring trends, the unemployment rate is likely to increase in the coming months.

U.S. manufacturing activity declined for the seventh month, with a PMI of 46.5. Only two industries reported growth amid persistent demand shortages and rising costs.

Economic activity in the U.S. manufacturing sector continued its decline in October, marking the seventh consecutive month of contraction. The Manufacturing Purchasing Managers' Index (PMI) fell to 46.5, down from 47.2 in September and representing the lowest PMI reading recorded in 2024. The new orders index showed a slight improvement, rising to 47.1 from 46.1 in September. Meanwhile, the production index dropped significantly to 46.2, down from 49.8 in the previous month, indicating a deeper contraction. The employment index remained weak, registering at 44.4, while the price index returned to expansion at 54.8, signalling an increase in raw material costs.

Among the six largest manufacturing industries, only two—food, beverage, and tobacco products (which expanded by 1.2%) and computer and electronic products—reported growth. In contrast, eleven industries faced declines, including textile mills, transportation equipment, and machinery. Survey respondents cited a persistent lack of demand, leading to a reluctance to invest in inventory or capital. New export orders rose slightly to 45.5, while the import index remained stagnant at 48.3. Overall, these indicators reflect ongoing challenges in the manufacturing sector amidst fluctuating demand and economic uncertainties.

We expect the downturn in the manufacturing sector to weigh on growth in the fourth quarter. Additionally, we believe that this ongoing decline could further support the case for a 25 bp rate cut at the November 7 meeting.