Week starts with blurred sentiment on the back of mixed US jobs data, and soft Chinese trade figures.
Chinese exports and imports unexpectedly shrank in October; this was the first synchronized drop since May 2020. The strict Covid curbs in China, combined to rising global inflation and tightening monetary conditions hit both global and domestic demand. A far lower-than-expected trade surplus confirmed how Xi Jinping’s stubborn zero Covid fight is hurting the country’s economy.
And it’s not over. Despite optimism last week that the Covid measures could be wined down slowly to let people and the economy breath, the Chinese officials reiterated that they will ‘unswervingly’ stick to the Covid zero approach. Therefore, expect last week’s gains in Chinese stocks to be given back.
Nasdaq’s Golden China index jumped more than 30% since October dip, but the latest bullish action could simply be another flash in the pan. In fact, China is not expected to ease the Covid curbs at least until the end of this winter…
Then, let’s talk about what happened with the jobs data in the US last Friday
At the first glance, the data was strong, stronger-than-expected, but the market reaction was unexpectedly, surprisingly positive.
NFP printed that the US economy added 261’000 new nonfarm jobs in October versus 200’000 expected by analysts. The wages also grew more than expected last month, by 0.4%, versus 0.3% penciled.
Both data points were unideal for inflation and the Fed expectations, so you would’ve expected a panic selloff, rather than joyful rally in the market.
But the uptick in unemployment number – which rose to 3.7%, from 3.6% printed a month earlier, and the fact that 261’000 job additions was the slowest number since January this year – combined to all the layoff news which could ‘hopefully’ pull next month’s figure below 200’000 – triggered buying.
US equities first rally on the data, then give back gains as the hawkish Fed feelings came back in charge, but then the buyers came back in to lead to a 1.36% advance in the S&P500 before the closing bell. Nasdaq closed 1.56% higher, while the Dow Jones added 1.26%.
But overall, all three of them closed last week with losses. The Dow ended the week 1.4% down, S&P 500 3.4% down and Nasdaq 5.7% down – and the US futures are in the negative at the time of writing.
US midterms and inflation
Let’s admit… Joe Biden didn’t have an easy mandate. First the pandemic, and then the war in Ukraine, and the energy crisis, and the rising inflation, and the rising interest rates, the turmoil in financial markets, skyrocketing mortgage rates, gas prices… it has been a terrible mix for hoping to see a stunning support for these midterms.
Statistically speaking, markets have performed better in the six months following voting, than six months prior to it. The expectation for this week’s midterms is a divided government between the White House and Congress, that could, in return lead to more political impasse and tighter maneuver margin for policies, and a slower economic growth.
But historical data tells us that the stock markets performed better with a divided government in the years following a same party controlling the Senate, the House and the Presidency. This is what we hope will happen this time around, as there is not much juice left to be squeezed after the massive selloff we experienced so far this year in the stock markets, anyway.
On the economic data front, US inflation is expected to have eased from 8.2% to 8.0% in October, core inflation is seen down to 6.5% from 6.6% printed a month earlier.
Stronger-than-expected inflation data could send global stocks lower by the end of this week. Therefore, gains, if any, will likely be vulnerable to a potentially unpleasant US inflation data by Thursday.
And if the data is better than expected? Then, we could see a market rally. Investors are impatient to buy the dip at the current levels. Even if the data beats expectations slightly, it should be enough to send stocks higher.