Global stocks remain on the high side, but caution is required. The TPP weekend update

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London's stock markets closed out the week with mixed results on Friday, reflecting a cautious mood as investors reacted to economic growth data out of China, as well as an improvement in UK retail sales.

The FTSE 100 index slipped 0.32% to end the session at 8,358.25 points, while the FTSE 250 inched up 0.23% to 21,149.58. However, the week was a positive one on the whole with the FTSE 100 ending 1.27% up, mostly on the back of positive inflation figures released on Wednesday.

In currency markets, the pound was up 0.22% on the dollar trading at $1.3039, while it edged down 0.05% against the euro closing at €1.2009.

In economic news the main headline this week was the slower-than-expected UK inflation report along with a further decline in wage growth which opens the door for the Bank of England to lower borrowing costs again.

The consumer price index rose 1.7% in the year through September, the lowest rate since April 2021 and below forecasts for 1.9%. Services inflation, which is closely watched by the BoE, decelerated to a more than two-year low of 4.9%. The largest downward contribution to both measures came from transport costs, as airfares and motor fuel costs declined sharply.

Wage data indicated that upward pay pressure, a driver of still elevated levels of underlying inflation, may be easing. In the three months through August, regular pay, which excludes bonuses, increased 4.9% year over year, down from 5.1% in the previous period and the slowest rate of growth in more than two years. There were signs that the labour market may have loosened as well, with tax records showing a fall in payroll employment and job openings in July and August.

On Friday we saw UK retail sales in September exceeded expectations. According to the Office for National Statistics, month-over-month sales volumes rose 0.3%. Growth was slower than the 1% improvement seen in August but was comfortably ahead of forecasts for a 0.3% decline.

Volumes were also at their highest index levels since July 2022 with year-over-year, sales jumping 3.9%, the largest annual rise since February 2022.

The best performing sector was computer and telecommunications, which helped partially offset a 2.4% decrease in supermarkets. Other non-foods, which include tech, spiked 5.5%.

Cooler weather also helped support clothing and footwear sales increase.

Kris Hamer, director of insight at the British Retail Consortium, said: “Autumn led people to upgrade their wardrobe, as well as the last minute student dash for new computers, as the new academic year began.

“Big ticket items, such as furniture and other household goods, continued to take a hit from some consumers, such as those saving for Christmas or preferring to spend on experiences.”

Erin Brookes, European retail and consumer lead at Alvarez & Marsal, said: “While consumers remain cost conscious, budgets are somewhat less strained than they were a year ago.

“However, consumer confidence remains fragile, particularly ahead of the Budget later this month, with uncertainty about the impact on household finances.”

Europe

The STOXX Europe 600 Index ended the week 0.58% higher as a second consecutive interest rate cut by the European Central Bank stoked expectations for further easing of monetary policy. Major stock indexes rose with Italy’s FTSE MIB gaining 2.61%, Germany’s DAX 1.46%, and France’s CAC 40 Index 0.46%.

As expected, the ECB lowered its key deposit rate by a quarter of a percentage point to 3.25%, the first back-to-back reduction in 13 years. ECB President Christine Lagarde said that the disinflationary process seemed to be “well on track,” citing recent downside surprises in economic activity data. Although the ECB reiterated that it would not pre-commit to a particular rate path, financial markets appeared to expect the ECB to reduce rates in December to support the economy.

The European Commission’s statistics office reported that annual inflation came in at 1.7% in September, a downward revision from its initial estimate of 1.8% and well below the ECB’s stated target of 2%. The ECB forecasts that inflation will rise again before falling back toward the 2% target next year.

U.S.

The S&P 500 Index advanced, paced by the utilities and real estate sectors. Energy stocks pulled back in sympathy with oil prices, which retreated as fears of possible Israeli attacks on Iran’s oil and gas infrastructure subsided. Returns were stronger down the market cap spectrum, with the small-cap Russell 2000 Index and the S&P MidCap 400 Index outperforming.

After lagging for much of the week, the Nasdaq Composite rallied during Friday’s trading session. Strong quarterly results from Taiwan Semiconductor Manufacturing, which operates foundries that make advanced digital semiconductors, appeared to reignite excitement for artificial intelligence-related stocks that are in the Nasdaq. The tech-heavy benchmark also received a lift after some companies reported earnings that surprised to the upside. Netflix, for example, grew its subscriber numbers and expanded its operating margins by more than expected in the third quarter.

In an encouraging sign for third-quarter economic growth, the value of U.S. retail sales increased 0.4% last month, accelerating from the 0.1% uptick registered in August. The September reading was slightly above the consensus estimate for a 0.3% gain. Strength in consumer spending was broad-based: 10 of the 13 retailer categories reported higher sales for the month. A measure of retail sales that excludes auto dealerships, building materials, food services, and gas stations climbed 0.7% from the prior month, the fastest rate of growth in three months.

Industrial production dropped 0.3% in September after increasing 0.3% in the preceding month. The final number for August was revised downward from an initial estimate of 0.8%. The Federal Reserve attributed this weakness to Hurricanes Francene and Helene, along with an aircraft machinist strike at Boeing.

Asia

Japan’s stock markets fell in with the Nikkei 225 Index down 1.58% and the broader TOPIX Index losing 0.64%. Easing domestic inflation in September, although expected, led to some speculation that the Bank of Japan may be less likely to raise interest rates again this year.

The latest comments from BoJ officials emphasized that while the prerequisite conditions for beginning monetary policy normalization have already been met, with BoJ Board Member Seiji Adachi citing the breadth of items undergoing price increases, rate hikes should be implemented at a very gradual pace. Adachi warned that the BoJ must avoid a drastic change in policy given uncertainties about the outlook for the global economy and domestic wage growth. The yield on the 10-year Japanese government bond rose to 0.97% from 0.94% at the end of the previous week.

In the currency markets, the yen weakened from the low to the high end of the JPY 149 range relative to the U.S. dollar. Recent moves in the yen were described as “somewhat one-sided and rapid” by Japan’s top currency diplomat, Atsushi Mimura. He said that authorities continue to closely watch foreign exchange moves, including speculative ones, with a high sense of urgency. The yen is approaching levels where authorities intervened earlier in the year to stem the currency’s decline.

Chinese equities rose as the central bank unveiled more support measures after data showed that deflationary pressures grew more entrenched in the economy. The Shanghai Composite Index gained 1.36%, while the blue chip CSI 300 added 0.98%. In Hong Kong, the benchmark Hang Seng Index fell 2.11%.

China’s economy in the third quarter expanded 4.6% from year-ago levels, beating a consensus estimate. This growth rate was slightly lower than the 4.7% expansion recorded in the second quarter and below the government’s stated target of “around 5%.” On a quarter-over-quarter basis, the economy grew 0.9%.

Other economic data showed signs of improvement. Industrial production rose a better-than-expected 5.4% in September from a year earlier, up from August’s 4.5% increase. Retail sales grew an above-forecast 3.2% year over year, an acceleration from the 2.1% increase logged in August. Higher sales of household appliances were a contributing factor.

The Week Ahead

Next week brings public borrowing figures, alongside consumer confidence and business optimism data as the UK draws ever-closer to the Autumn Budget.

As speculation mounts over wide-ranging tax hikes on government warnings of a £22 billion “black hole” in public finances, eyes will be on how UK borrowing has developed, as well as how businesses and consumers alike are faring, prior to the October 30 Budget.

Last time out, figures showed net public borrowing had increased more than expected to £13.7 billion in August, against £9.5 billion a year earlier.

According to Trading Economics, expectations are for the figure, which is due on Tuesday, to have risen once again to £14.7 billion in September.

This would come as anticipations grow around further borrowing by chancellor Rachel Reeves to fuel an investment spree in the Budget, coupled even with a tweak to fiscal debt rules.

Business optimism data from the CBI and GFK consumer confidence figures are then due later in the week, on Thursday and Friday respectively, with further successive drops in both expected as attention increasingly turns to the Budget.

A string of purchasing managers index data is also due from S&P Global over the course of next week, covering both sides of the Atlantic, while durable goods order figures and further insight into consumer confidence in the US will feature as well.

Major banks are among a score of blue-chip companies set to update from London next week.

Following a quiet Monday, Holiday Inn owner IHG will kick off proceedings on Tuesday in the hope of building on gains after shares have rallied since its last update in August.

Wednesday then brings updates from Lloyds and consumer goods firm Reckitt Benckiser, after the former has grappled with mortgage volatility on changing interest rate expectations recently.

NatWest will then close out the big-name company reports in London on Friday, with Boeing, General Motors, Tesla and Amazon among those in line to update from across the Atlantic over the week.

Generally, it’s looking like a fairly quiet week but as ever, this doesn’t mean the market won’t move. Enjoy the rest of your weekend and good luck with your portfolio next week.

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