US bond yields mixed; long-term bonds outperformed. Nasdaq 100 gains were driven by Tesla, while the US dollar strengthened. Crude oil rose, gold hit new highs, and Bitcoin slightly declined.

US bond yields had a mixed performance last week, with longer-term bonds showing stronger results. The US yield curve has been on an upward trend for over a month, and the gap between 10-year and 2-year Treasury bond yields has widened significantly in the last 15 months. The increase in long-term bond yields comes despite the Federal Reserve's recent 50-basis-point rate cut, signalling market expectations of persistent inflation. Moreover, US government debt has soared by $1.6 trillion in the last four months.

In equity markets, all indices except the Nasdaq 100 recorded negative returns. Small-cap stocks dropped nearly 3%, while large-cap stocks fell by about 1%. Small-cap stocks continue to trade at a discount, displaying significantly lower valuations compared to their large-cap counterparts. Notably, shares of the "Magnificent 7" rose over 5%, largely driven by Tesla, whose shares soared 22.91% after reporting strong earnings. This boost helped the Nasdaq close the week on a positive note.

The US dollar strengthened against the euro, reaching 0.92780, as markets perceive a higher likelihood of rate cuts in Europe than in the US. In the commodities sector, WTI crude oil prices increased by 3.37%, primarily due to rising tensions in the Middle East ahead of anticipated ceasefire talks in Gaza. This situation presents President Biden with a last chance to negotiate before the elections, though expectations of oversupply are keeping prices in check. Conversely, gold prices climbed back to all-time highs, exceeding $2,760 per ounce. In the cryptocurrency market, Bitcoin saw a slight decline of nearly 0.49%.

October PMI data shows service sector growth and manufacturing contraction, with rising consumer sentiment. The housing market struggles with declining existing home sales and cautious developer sentiment amid ongoing economic uncertainties.

The October PMI data reflects a nuanced landscape in the U.S. economy, showing growth in the service sector while manufacturing faces continued contraction. The Composite Output Index improved to 54.3, driven primarily by the service sector, where the PMI rose to 55.3, buoyed by increased domestic demand. Conversely, the manufacturing sector’s PMI edged up to 47.8, with ongoing declines in new orders contributing to rising inventory levels. The employment sector reported a slight decline, influenced by uncertainties surrounding the upcoming Presidential Election. In the housing market, existing home sales fell 3.5%, whereas new home sales increased, highlighting cautious developer sentiment as indicated by a 3.1% drop in building permits. Consumer sentiment rose for the third consecutive month, reaching its highest level since April 2024, supported by improved purchasing conditions for durable goods and declining inflation expectations, amid shifting political dynamics.

October PMI data shows service sector growth, manufacturing contraction, and increased optimism, with employment and inflation rates showing modest changes.

US PMI survey indicates a promising start to the fourth quarter, with the PMI Composite Output Index registering 54.3, up from 54.0 in September. This marks a 2-month high and reflects a sustained expansion in business activity. However, the growth was predominantly driven by the service sector, as manufacturing output continued to contract for the third consecutive month. Employment also saw a slight decline for the third month in a row amid ongoing uncertainty surrounding the Presidential Election. Sales are being stimulated in part by more competitive pricing, which has contributed to reducing inflation in the prices of goods and services to its lowest level since the initial downturn caused by the pandemic in early 2020. These lower price pressures align with inflation rates falling below the Federal Reserve's 2% target.

In the manufacturing sector, the US Manufacturing PMI rose to 47.8, achieving a two-month high. However, new orders continued to decline, leading to a rise in unsold stock levels. This trend has resulted in a fourth consecutive month of increasing finished goods inventories, maintaining the orders-to-inventory ratio at one of its lowest points since the global financial crisis. While the rate of decline has moderated, the manufacturing sector remains under pressure, exacerbated by weaker-than-anticipated sales.

In contrast, the service sector displayed strong growth, with the Services PMI reaching 55.3, a slight increase from 55.2 in September. This 2-month high was driven by the largest increase in new business since April 2022. Growth in the service sector has been supported by rising domestic demand, which has compensated for a slight decrease in export orders. In October, inflation rates for input costs and prices charged significantly slowed, with service sector inflation dropping to its lowest level since May 2020. Overall, the future outlook appears optimistic, as confidence within the service sector has reached a 16-month high, with companies anticipating a more favourable economic environment following the election.

We anticipate that the manufacturing sector will be the primary constraint on economic growth in 2024, although the services sector is expected to mitigate some of this weakness.

The U.S. housing market is struggling, with existing home sales down 3.5% and first-time buyers at a historic low of 26%. New home sales increased, but building permits fell by 3.1%, indicating cautious developer sentiment.

The U.S. housing market is facing significant challenges, with existing home sales declining by 3.5% YoY, resulting in a seasonally adjusted annual rate of 3.84 million units—its lowest level since October 2010. Market conditions remain tight, with first-time buyers accounting for only 26% of total purchases, a historic low. The median sales price has risen by 3% to $404,500, while inventory levels are sufficient for 4.3 months of sales, representing the highest supply in over four years. The primary factors behind this slowdown are persistently elevated interest rates and high home prices.

In contrast, new home sales increased significantly in September, reaching a seasonally adjusted annual rate of 738k units, a 4.1% rise from August and a 6.3% increase from the previous year. The median sales price of new homes is $426,300, with a higher median price of $501,000, and inventory levels stand at 470k units, equivalent to a 7.6-month supply at the current sales pace.

Additionally, building permits have declined by 3.1%, reflecting cautious sentiment among developers and investors in the construction sector. This drop, which follows a 4.6% increase in the previous month, may signal potential impacts on related sectors, such as finance and employment, and serves as a barometer of overall economic health.

The broader housing market is poised for its weakest performance since 1995, and we maintain our view that a recovery is unlikely before 2025. Although mortgage rates remain elevated, they are expected to gradually decline in response to anticipated Fed rate cuts.

Consumer sentiment rose for a third month, buoyed by improved durable goods conditions and lower inflation expectations, with optimism shifting amid election dynamics.

Consumer sentiment rose for the third month in a row, reaching its highest since April 2024 and now standing over 40% above the June 2022 low. This improvement largely stems from better purchasing conditions for durable goods, thanks to easing interest rates. The upcoming presidential election is shaping consumer outlooks, with a shift in administrative expectations as those anticipating a Harris presidency fell from 63% in September to 57% in October. Sentiment among Republicans rose by 8%, reflecting increased confidence in their candidate’s economic impact, while Democrats’ sentiment dropped by 1%. Independents remained in the middle, with a 4% rise in optimism this month. Year-ahead inflation expectations were revised down to 2.7% from 2.9%, within the pre-pandemic range of 2.3-3.0%, while long-term inflation expectations remained stable at 3.0%, still modestly above typical pre-pandemic levels.

We have previously discussed this rebound and maintain our expectation for further increases in consumer confidence as the year draws to a close. This anticipated rise is primarily driven by the Federal Reserve's planned interest rate cuts, decreasing inflation rates, and the results of the elections.