Last week (10/2-10/6), global stock markets showed divergent performance. In the US, the S&P 500 index rose by 0.48%, the Nasdaq 100 index increased by 1.75%, while the Dow Jones index declined by 0.30%. In Europe, the STOXX 600 index fell by 1.17%. Among Asian markets, the Nikkei 225 index experienced the largest decline, dropping by 2.71%.

【Source: MacroMicro；Date2023/10/2-2023/10/6】

【Source: MacroMicro；Date2023/1/1-2023/10/6】

According to data released by the US Bureau of Labor Statistics on October 6, the non-farm payrolls in the United States increased by 336,000 in September, far exceeding the expected 170,000. The data for the previous two months was also revised upward by nearly 120,000. The unemployment rate in September remained at 3.8%, unchanged from August.

However, wage growth fell below expectations, with average hourly earnings increasing by 0.2% month-on-month in September, lower than the expected 0.3%. On a year-on-year basis, wages grew by 4.2%, marking the smallest annual increase since mid-2021.

【Source：MacroMicro】

The stronger-than-expected job growth indicates that the US economy is still performing well, leading to an increase in market expectations for a rate hike by the Federal Reserve later this year. As a result, there was a short-term "flash crash" in US stocks and bonds after the data was released. However, the unexpected slowdown in wage growth brought some good news, as it could potentially deter the Fed from raising interest rates. After some reflection, the US stock market staged a major turnaround during trading hours and ended up closing higher.

Currently, the market expects a 21.7% probability of a rate hike in November by the Federal Reserve and a 34.2% probability in December, which is still relatively low. Although most analysts acknowledge that a rate hike later this year has become possible again, the market believes that the surge in US bond yields has reduced the necessity of raising rates.

【Source：CME】

Mitrade Analyst：

The strong US labor market has not led to a significant increase in rate hike expectations. In addition to the positive news of a unexpected slowdown in wage growth, market participants believe that the Federal Reserve's "lack of courage" to raise rates further is an important factor. Higher interest rates would further accelerate the already bloated fiscal situation in the United States.

This week, attention will be given to the release of US CPI and PPI data. If inflation remains moderate, it will be beneficial for the stock market. Conversely, if the data exceeds expectations, it will dampen the stock market.

Last week, oil prices plummeted with WTI crude futures dropping nearly 9% and Brent crude futures falling over 8%. The decline in oil prices dragged down energy stocks, with the S&P Energy sector experiencing a cumulative decline of 5.2% last week. ExxonMobil (XOM) dropped by 9%, and Occidental Petroleum (OXY) fell by 6%.

【Source：spglobal；Energy Select Sector Index VS S&P500】

The significant drop in oil prices can be attributed to two factors: renewed concerns about demand and rumors of increased production by Saudi Arabia. Despite a larger-than-expected decrease in crude inventories, sluggish gasoline demand has put pressure on oil prices. Additionally, media reports suggest that Saudi Arabia has expressed its intention to increase oil output to facilitate a "US-Saudi joint defense agreement" at the White House.

Apart from the impact of oil prices, selling by hedge funds has also contributed to the decline in energy stocks. Goldman Sachs data shows that energy is one of the sectors in which hedge funds have been net sellers in nominal terms recently, as they shift their focus back to technology stocks.

However, the latest geopolitical turmoil could provide momentum for a rebound in energy stocks. On October 7th, the Israeli-Palestinian conflict escalated again, and this conflict could lead to a short-term increase in oil prices, thereby benefitting energy stocks.

Mitrade Analyst：

Geopolitical crises in the Middle East often lead to an increase in oil prices. This week, attention is focused on whether the Israeli-Palestinian conflict will escalate further. If the impact expands, it could affect Iran's oil production while delaying negotiations between the United States and Saudi Arabia, reducing the likelihood of increased Saudi production. This would be beneficial for oil prices. Additionally, an escalation of the Israeli-Palestinian conflict could also impact the long-term natural gas supply situation. Against this backdrop, there is a potential for further upward movement in energy stocks.

Last week, long-term US Treasury bond yields surged as the 10-year Treasury yield surpassed 4.8%, reaching its highest level since 2007.

【Source：MacroMicro】

The sharp increase in long-term rates can be attributed to three primary reasons. Firstly, the US economy has exhibited stronger resilience, leading to a repricing of market uncertainty regarding the delayed path of interest rate cuts. Secondly, there has been an upward revision in inflation expectations. Thirdly, concerns about the sustainability of US debt have escalated.

Currently, the yield offered by US Treasuries, considered risk-free assets, has exceeded the earnings yield of the S&P 500. The spread between investment-grade corporate bonds and long-term US Treasuries is showing a narrowing trend. In May this year, there was a brief inversion between corporate and government bonds due to concerns about the debt ceiling, highlighting genuine worries about potential US bond defaults.

【Source：gurufocus】

Mitrade Analyst：

The current technical analysis of US bonds indicates oversold conditions, but in the face of various unfavorable factors, it is difficult to expect a short-term peak. It is recommended that risk-averse investors consider investing in short-term US bonds (3 months to 1 year) with relatively stable trends.

As for the stock market, our previous viewpoint remains unchanged. With long-term interest rates remaining high in the United States, the possibility of a significant upward trend in the short term is unlikely, and there is a higher probability of volatility. However, we are optimistic about the year-end market and have a target price of 4500 for the S&P 500 by the end of the year.