Welcome to the second issue of the Bocconi Student Asset Management Club newsletter!
Global Economy
Before we get into this week's events, let's look at our economic calendar, which provides a useful guideline for the important data releases to keep an eye on.
U.S.
Employment
The last week of October has been eventful for markets in the U.S. On October 30th, there was the release of the ADP National Employment Report, which measures the change in non-farm, private employment. The report, which is based on payroll information of around 400,000 business clients, is published two days in advance with respect to the government's non-farm payroll report. The actual indicator (233K) turned out to be higher than the expected one (110K), which is regarded as positive. Although this is usually a good predictor of the following government's report, data released on November 1st shows that job growth in October 2024 reached the lowest level since December 2020. Indeed, total nonfarm payroll employment increased by only 12,000 units in October, meaning that growth was virtually non-existent and much lower than the analysts’ estimate of 120,000 new jobs. Similarly, the unemployment rate stayed constant at 4.1% - job losses occurred mainly in the temporary help services and, due to strikes, in manufacturing.
Inflation and the Personal Consumption Expenditures Price Index
Inflation has been slightly growing, as shown by the PCE price index. This indicator, included in the Personal Income and Outlays report, measures the change in the price of goods and services in the U.S. The index reflects a wide range of customer purchases and expenses, representing a reliable estimate for inflation. The PCE price index compares prices for the same month of consequent years; for instance, data for September shows a 2.1% increase, the smallest year-on-year growth since February 2021.
PMI
The manufacturing sector continues to shrink, but the magnitude of the contraction decreases. In October, the S&P Global Flash US Manufacturing PMI reached 48.5 from a preliminary 47.8. This is mostly due to lower inflationary pressures, diminishing output price inflation and smaller rise in input costs. Conversely, uncertainty related to the Presidential Election negatively affects the manufacturing industry.
EMEA
The eurozone economy grew by 0.4% in the third quarter surpassing the forecast of 0.2%. Germany narrowly avoided recession with a 0.2% expansion, while France and Spain also posted stronger than expected growth. Italy’s economy, however, showed no growth.
Meanwhile in the UK, awaiting the GDP growth data that will be released next week, the Labour government, under finance minister Rachel Reeves, has introduced a new budget: a £40 billion tax hike aimed at reversing the fiscal instability left by Liz Truss’s 49-day tenure. With Labour in power for the first time since 2010, this budget showcases the party’s support of fair taxation, SME support, and public investment. The tax increase primarily targets businesses and higher earners instead of the working class, with National Insurance contributions from employers providing £25 billion.
While Reeves’ strategy successfully protects the working class, SMEs have voiced concerns about the increased taxation and minimum wage increase harming hiring and growth. Therefore, Reeves increased the Employment Allowance to £10,500, which enables SMEs to hire double the amount of minimum wage workers without incurring National Insurance costs.
The key question is, what will the budget be spent on? It will primarily funnel into infrastructure projects by using £100 billion to improve roads, rail, healthcare, and affordable housing over the next five years, indicative of a push towards long-term economic stability. While markets were initially cautious, Reeves’ emphasis on tax hikes on business versus the working class and detailed outline of budget spending boosted the FTSE 250 and UK banking stocks. Nevertheless, right-wing critics are wary of Labour’s “tax and spend” strategy that could risk growth.
Reeves is undoubtedly making a bold move to raise £40 billion which begs the question: will this new budget steer the economy toward stability or lead to further challenges as seen in Liz Truss’ tenure?
APAC
On November 1st, the International Monetary Fund (IMF) cut Japan’s growth forecast from 0.9% to 0.7% for the current fiscal year due to weakened exports during an already fragile economic recovery. Given that Japan is an export-reliant economy, the regulation, demand, and supply chain issues in key export markets like the Chinese & American automotive industry has been significantly slowing economic recovery.
What’s key to notice here is that the IMF’s forecast aligns with the Bank of Japan’s (BoJ) recent policy shifts, indicating a move away from the decade-long phase of easy monetary policy conditions. With lower growth projections, Japan is vulnerable to higher inflation, decreasing household purchasing power due to rising import prices from a weaker yen.
This economic fragility might push the BoJ to hike rates during their December meeting to stabilize the yen, make imports cheaper, and hopefully alleviate inflationary pressures. While the BoJ kept rates constant in the most recent October meeting, political pressures after Japan’s ruling coalition lost its majority could lead to a January rate hike instead of December.
The forecasted reduction in growth by the IMF and BoJ’s upcoming rate hike decision is indicative of a larger issue, rising global uncertainty adding pressure to the Japanese economy.
Market pills from the rest of the world
In Argentina, on Friday the Central Bank cut interest rates, with the goal of sustaining local markets and signalling optimism. The decision arrived after an improvement in inflation outlook; indeed, while yearly inflation remains above 200%, monthly inflation has lowered to around 3.5% from over 25% at the end of last year.
In Russia, the manufacturing sector expanded over the last month, enjoying the effects of the growth in export orders. On one side, output and new orders kept shrinking because of weak customer demand. On the other hand, as the report published on November 1st shows, the S&P Global PMI for Russian manufacturing rose to 50.6 from 49.5, as a result of manufacturers' expectations of future demand. Indeed, Russia's significant spending on military equipment and the advent of new export markets have been sustaining growth in the manufacturing industry.
Equity Highlights
U.S.
The S&P 500 registered its second consecutive week of losses, likely influenced by investor caution ahead of upcoming elections and rising bond yields tied to recent economic data.
Regarding earnings reports, while most of the companies this week exceeded revenue and profit expectations, their mixed guidance for the next quarter and varied spending plans led to notable market volatility.
Microsoft and Apple issued forecasts that fell below analyst estimates, while Meta’s planned AI investments raised concerns over potential pressure on margins. Investors are watching closely to see when AI investments might start delivering returns and broader adoption. Amazon, however, beat expectations for the third quarter, driven by growth in cloud and advertising, and its stock rose about 7% on Friday.
EMEA and APAC
The markets in Europe plummeted. Major indexes were impacted by worries about a worsening crisis in the Middle East, poor business profits, and a change in expectations for rate cuts by the European Central Bank.
As the Bank of Japan held interest rates constant despite persistent political unpredictability, Japanese markets rose during the week, with the Nikkei 225 gaining. Chinese stocks fell in the meantime, despite statistics showing a rise in economic activity.
Fixed Income Focus
U.S. Par Treasury Curve
The upcoming elections in the United States have not had a significant impact on U.S. yield curve, which have largely followed the same pattern throughout October. In fact, this week, bond yields edged up, driven in part by inflation data that came in warmer than expected.
At the same time, U.S. Treasury yields may be influenced by rising U.K. bond yields. Recently, British 10-year Gilts reached a one-year high following U.K. Finance Minister Rachel Reeves's inaugural budget, which outlined plans for increased spending and acknowledged higher inflation expectations. This have led to a shift in outlook regarding rate cuts from the Bank of England.
U.S. rate cuts expectations
While predictions for Federal Reserve rate cuts are starting to soften, investors seem to be accepting the possibility of fewer reductions, as long as the economic data remains robust.
Right now, the CME FedWatch tool shows a great chance for 25 bps cut during next Fed’s meeting.
Eurozone Government Bonds
Regarding eurozone government bonds, it is extremely important to underline the upward trend of almost all the AAA rated bonds with different YMs, with especially the bond with residual maturity of 3 years that recorded an increase of approximately 0.2 in yield in % between the 24th of October and the 31st of the same month.
The choice of rates' cut made by the ECB 2 weeks ago provoked new reactions among the EU countries. The speech that Bank of Italy Governor Fabio Panetta had at World Savings Day event in Milan is one such example; in that occasion, Panetta decided to send a clear message to ECB president Christine Lagarde: "We need to consider further rate cuts because the current restrictive monetary policy risks hampering economic growth".
Wrap up for the Asset Management Division
Next week is set to be important, with the Federal Reserve meeting and elections coming up, which will likely bring some volatility to the stock and bond markets. An interest rate cut looks likely, but how the Fed communicates its plans will be crucial.
Right now, the stock market looks overvalued. The Buffett Indicator shows that total market capitalization is at 195.6% of GDP. Historically, this suggests that investors might only see returns of about 0.3% per year, including dividends. Given this backdrop, we’re still optimistic about silver and gold mining companies, which can be a haven when things get shaky.
On the bond side, we’re seeing an attractive opportunity that hasn’t been around in nearly two decades. With higher yields, bonds are a good option for investors looking for reliable, low-risk income. If you’ve been in money market funds or short-term CDs, it might be a good time to consider locking in longer-term bonds for both steady income and potential price gains.
Credits:
Andrea Zito (Team Leader)
Lavinia Catalano (Global Economy analyst)
Mahek Dodani (Global Economy analyst)
Pablo Ruiz (Equity analyst)
Vladimir Pashov (Equity analyst)
Filippo Caselli (Fixed income analyst)
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