Rates, Tariffs, Inflation, & A Stock Market Forecast

Top things to watch this week

The Economic Calendar:

MONDAY: Dallas Fed Manufacturing Index (9:30a CT), 5-Year Note Auction (12:00p CT), Treasury Refunding Financing Estimates (2:00p CT)

TUESDAY: Good Trade Balance (7:30a CT), Wholesale Inventories (7:30a CT), Retail Inventories (7:30a CT), Redbook (7:55a CT), House Price Index (8:00a CT), Consumer Confidence (9:00a CT), JOLTS (9:00a CT), Dallas Fed Manufacturing Index (9:30a CT), 7-Year Note Auction (12:00p CT)

WEDNESDAY:  MBA Mortgage Applications (6:00a CT), ADP Employment Change (7:15a CT), GDP (7:30a CT), Real Consumer Spending (7:30a CT), Treasury Refunding Announcement (7:30a CT), Pending Home Sales (9:00a CT), EIA Petroleum Status Report (9:30a CT)

THURSDAY: Challenger Job Cuts (6:30a CT), Jobless Claims (7:30a CT), Core PCE (7:30a CT), Employment Cost Index (7:30a CT), Chicago PMI (8:45a CT), EIA Natural Gas Report (9:30a CT), Fed Balance Sheet (3:30a CT)

FRIDAY: October Jobs Report (7:30a CT), Unemployment Rate (7:30a CT), S&P Global Manufacturing PMI (8:45a CT), Construction Spending (9:00a CT), ISM Manufacturing Index (9:00a CT), Baker Hughes Rig Count (12:00p CT)

Key Events:

• Pivotal week with many critical economic data reports and earnings.
• Six(6) trading days until the U.S. election.
• U.S. Q3 GDP (growth) on Wednesday.
• Federal Reserve’s favored inflation gauge – PCE report on Thursday. 
• October jobs and payroll report on Friday.
• The Fed blackout starts with the FOMC meeting approaching on Nov. 7.
• Economic data on economic growth, inflation, and the labor market.
• It’s been a busy earnings season, with five of the Mag 7 reporting—Apple, Microsoft, Amazon, Alphabet, and Meta Platforms. Other reports came from Ford, Eli Lilly, Uber, Starbucks, Exxon, and Chevron.

STOCK INDEX FUTURES

The 6000 trading level in the S&P 500 is on hold for now as traders prepare to digest an important week of corporate earnings and key economic reports.

Last week, the main drivers were disappointing earnings reports and a sneaky bond sell-off, which drove the U.S. Treasury 10-year yield back up to 4.25%.

Conversely, the Nasdaq 100 extended its weekly win streak to seven and took out a new record intraday high after 74 trading days. A +20% move in Tesla helped the cause.

The S&P 500 closed the week lower by -0.95%, and the Nasdaq 100 yielded a small gain of +0.17%.

With earnings season in full swing and buyback windows reopening, multiple catalysts could propel the stock market higher. But when?…

Source: TradingView

STOCK SECTOR PERFORMANCE

Financials, energy, and tech are leading the market higher in October.

GOLDMAN’S STOCK MARKET FORECAST

Goldman Sachs is predicting a shift in market leadership.

Goldman Sachs anticipates a significant change in the stock market’s performance over the next decade. The firm expects the S&P 500 Equal Weight Index to outperform the S&P 500 Index by 2-8% annually. This shift is attributed to the current high concentration of market capitalization among a few large-cap stocks (think Mag 7).

Looking ahead, Goldman Sachs forecasts an annualized nominal total return of 3% for the S&P 500 over the next ten years. This estimate falls within the 7th percentile of historical returns since 1930, indicating a period of potentially lower returns compared to the past decade, which saw a 13% annualized return.

The firm acknowledges the inherent uncertainty in future market performance and provides a range of possible outcomes, from -1% to +7% annualized returns.

INTEREST RATE FUTURES

The interest rate market will digest key data this week on economic growth, inflation, and labor. This will influence the Federal Reserve Governors as we approach the Fed’s interest rate meeting on November 7.

Markets now await crucial interest rate decisions from three major central banks, including the Federal Reserve. The UK government’s autumn budget is also in focus.

CRUDE OIL FUTURES

Crude oil prices rallied on Friday, driven by heightened geopolitical tensions in the Middle East. The ongoing conflict between Israel and Hamas has raised concerns about potential disruptions to oil supplies from the region.

West Texas Intermediate (WTI) crude futures closed at $71.69 per barrel, up $1.59 or 2.2%. Brent crude futures also gained ground, settling at $76.05 per barrel.

Traders are closely monitoring the situation in the Middle East and any potential impact on global oil supplies. The upcoming talks between U.S. and Israeli officials to negotiate a ceasefire and hostage release could influence market sentiment.

While geopolitical factors are driving the current upward trend in oil prices, the broader economic outlook and global demand for oil will also shape future price changes.

Source: TradingView

OUR TAKE ON TARIFFS AND THEIR EFFECT ON INFLATION, RATES AND the US DOLLAR

Trump has proposed a 60% tariff on Chinese imports and a 10% tariff on imports from all other countries (Mexico, Canada, etc.). This could increase customs revenue significantly by around $450 billion annually, with over a third from China.

Harris’s tariff policy is status quo and seems to lean towards maintaining current trade policies, possibly with targeted measures against China but no broad increase in tariffs against other countries.

While these tariffs might seem like a revenue windfall, several factors complicate this:

• Substitution Effect: Consumers and businesses might shift to goods from countries with lower tariffs or increase domestic production, reducing the expected revenue over time.
• Decline in Chinese Imports: China’s ongoing reduction in imports would likely accelerate, diminishing the tariff revenue base.
• Impact of NAFTA Countries: If Mexico and Canada are exempt from tariffs, or goods are tariffed only once despite multiple border crossings, revenue from these significant trading partners would be limited.

Market Interpretation and economic impacts of additional tariffs on inflation, rates, and the dollar:

• • Trump’s Policy:
    • Inflation: Likely to increase due to higher import costs directly affecting consumer goods prices.
    • Interest Rates: Upward pressure due to expected inflation, leading to higher borrowing costs for both government and consumers.
    • US Dollar: This could strengthen due to higher interest rates, potentially hurting US exports but attracting foreign investment.
  • Harris’s Policy:
    • Stability: Keeping tariffs unchanged might maintain current inflation rates, with no immediate impact on interest rates or the dollar’s value, unless targeted actions against China significantly affect trade balances.

PALLADIUM FUTURES

Palladium is up 10% after reports that the U.S. asked G7 members to consider sanctioning Russian Palladium.

Russia produces 38% of the world’s palladium (25% of the total supply if you take recycling into account), but the West doesn’t need Russian Palladium. It could survive on South Africa, Zimbabwe, North America, and recycled metal.

Short covering started during the second half of the summer, but Palladium remains quite short and sensitive to headlines per the extreme moves we saw at the beginning of this year.

Source: TradingView

BITCOIN / ETHEREUM FUTURES

Ethereum’s performance relative to Bitcoin has been notably weak in 2024, a trend that has persisted for several years. The transition to proof-of-stake in September 2022 has not significantly reversed this trend.

One significant factor contributing to Ethereum’s underperformance is the rise of layer-2 solutions. While these networks aim to alleviate Ethereum’s scaling issues, they also siphoned fees and users away from the main chain. The recent launch of Uniswap’s layer-2, Unichain, further highlights this trend.

The complex relationship between Ethereum and its layer-2 ecosystem raises questions about the long-term benefits of this approach. As more layer-2 networks emerge, the potential for fragmentation and competition increases, which could further impact Ethereum’s dominance.

Source: FRNT Financial

POLITICS & TRADE

The election countdown is at six(6) trading days. Below is a map showing how each candidate is affecting different market sectors.

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