The Davy Digest - 29th October 2024

US equities finished lower last week despite some strong earnings reports. Notably, Tesla shares rose after a strong earnings beat. This week will be an important week for earnings with five of the so-called “Magnificent Seven” due to report. On the macro front, last week’s flash PMIs showed that the US economy kept expanding at the start of Q4 with both manufacturing and services PMIs beating expectations. In Europe, German producer prices fell more than expected, mainly due to lower energy costs. Eurozone flash PMIs were well received by markets with the manufacturing PMI coming in at 45.9 vs 45.1 expected. In the UK, both manufacturing and services PMIs came in below forecasts. The People’s Bank of China announced cuts to benchmark lending rates as the government increases its efforts to stimulate the economy. The one-year loan prime rate was reduced to 3.1% from 3.35% while the five-year rate was cut to 3.6% from 3.85%. In Japan, Tokyo inflation slowed below 2% for the first time in five months mainly due to lower energy prices.

Last week's highlights

	Retail Sales (17/10) - Rose by 0.4% in September, coming in above consensus. Industrial Production (17/10) – Fell to -0.3% MoM (vs -0.2% expected).
	ECB Meeting (17/10) – Reduced rates by 25bps, as expected, remained confident around European growth and ongoing disinflationary trends.
	Unemployment (15/10) - Eased to 4.0% in the three months to August, following July’s 4.1%. Inflation (CPI) (16/10) - Rose by 1.7% year-on-year, down from 2.2% in the 12 months to August.
	China Q3 GDP (18/10) – Increased 4.6% from Q3 last year, coming in above consensus.

US equities finished lower last week despite some strong earnings reports. Notably, Tesla shares rose after a strong earnings beat. This week will be an important week for earnings with five of the so-called “Magnificent Seven” due to report. On the macro front, last week’s flash PMIs showed that the US economy kept expanding at the start of Q4 with both manufacturing and services PMIs beating expectations. In Europe, German producer prices fell more than expected, mainly due to lower energy costs. Eurozone flash PMIs were well received by markets with the manufacturing PMI coming in at 45.9 vs 45.1 expected. In the UK, both manufacturing and services PMIs came in below forecasts. The People’s Bank of China announced cuts to benchmark lending rates as the government increases its efforts to stimulate the economy. The one-year loan prime rate was reduced to 3.1% from 3.35% while the five-year rate was cut to 3.6% from 3.85%. In Japan, Tokyo inflation slowed below 2% for the first time in five months mainly due to lower energy prices.

Last week's highlights

	Flash PMIs (24/10) – Manufacturing at 47.8 vs 47.5 expected, services at 55.3 vs 55.0 expected. Strong PMIs show that US economy kept expanding at start of Q4.
	German Producer Price Index (21/10) – Fell 1.4%, more than expected, mainly due to lower energy prices.  Eurozone Flash PMIs (24/10) – Composite PMI as expected at 49.7. Services came in lower while manufacturing came in higher at 45.9 vs 45.1 expected.
	Flash PMIs (24/10) - Services PMI 51.8 vs 52.4 expected, Manufacturing PMI 50.3 vs 51.4 expected.
	PBoC Interest Rate Decision (21/10) – One-year loan prime rate reduced to 3.1% from 3.35%, five-year rate cut to 3.6% from 3.85%. Tokyo Inflation (CPI) (24/10) -  Slowed below 2% for the first time in five months largely due to lower energy prices.

This week promises to be a busy one in markets. In the US, the release of earnings reports from a number of mega tech companies will dominate headlines. The Fed’s preferred inflation measure, Core PCE, is due out on Thursday, with analysts forecasting a 2.7% increase compared to last year. Investors will be hoping this figure is not enough to spook markets for Halloween. Investors will also receive more US labour market data on Friday, the most recent report eased concerns as the unemployment rate ticked back down to 4.1% from 4.2%. Eurozone inflation is due on Thursday, two weeks after the ECB’s decision to cut rates by 25 basis points. In the UK, the details of the budget will be announced on Wednesday. The new Labour government is expected to announce increased taxes and investment with market participants watching closely for changes in public borrowing. The Bank of Japan will meet on Thursday and are expected to leave interest rates unchanged. Finally, in China, the Caixin manufacturing PMI will be released on Friday. The previous release signalled an expansion in the Chinese manufacturing sector as the PMI came in at 50.4, above the 50 level that signifies expansion.

What's on the radar

	Q3 GDP (30/10) US inflation (Core PCE) (31/10) Nonfarm payrolls (01/11) ISM Manufacturing PMI (01/11)
	Eurozone inflation (CPI) (31/10)
	UK Budget (30/10)
	Japan Unemployment Rate (28/10) Bank of Japan meeting (31/10) China Caixin Manufacturing PMI (01/11)

Chart of the moment

Worth the Weight

Source: Bloomberg as of 24/10/2024

• Q3 marked the S&P 500 Equal Weight Index's strongest quarter of outperformance versus the standard version of the index in nearly two years.
• The equal-weighted approach applies a uniform weight across all its constituents, while its more widely-quoted sibling is weighted by market capitalisation, allowing companies which are outperforming to account for a larger and larger proportion of the index.
• In recent years, this characteristic of the capitalisation-weighted index has driven its outperformance due to a growing concentration in mega-cap tech names, namely the Magnificent Seven.
• Periods of market narrowness, where the market-capitalisation index outperforms the equal-weighted approach, are not uncommon.
• We have previously seen examples of this in 2000 and 2021, and these episodes have typically been followed by a sharp broadening of the market where the S&P 500 Equal Weight Index outperforms.
• With the equal-weighted index outperforming the standard S&P 500 by 3.6% last quarter, we may be seeing the beginning of a regime shift in US equities.