US EARLY MORNING: US equity futures are seeing only slight gains at the start of the week following last week's solid rally

US PRE-MARKETS: US equity futures are trading with slight gains after last week's solid rally, which was underpinned by declining bond yields amid hopes that global central banks are close to concluding policy tightening, and rate cut bets for next year being boosted. The rally has given rise to debate whether this is an end-of-cycle rally, or the start of a sustained upswing. While the lower yield dynamics have supported equities, many are concerned that slowing growth dynamics ahead could end up offsetting the accommodation provided by looser yields. The problem, some argue, is that the data is giving both the bulls and bears fodder (see below). This week, the data slate is thin, so we are unlikely to see any resolution to the debate. Fed Chair Powell is due to speak on a couple of occasions, but is expected to reiterate the post-FOMC messaging (recap in our central bank weekly note here).

MIXED MACRO MESSAGES: Morgan Stanley's analysts note that US economic data has much for both the bulls and the bears: GDP has been solid, though the ISM has remained sub-50, while gauges of consumer and business confidence have been adrift. The October jobs reports surprised to the downside, though the three-month average remains elevated. "The data can support any view of the economy," MS writes, "we have maintained our view that the US economy avoids recession but slows as monetary policy restrains demand, and yet so far you have to squint to see the slowing," adding that "the rates selloff since the summer shows that the market has moved away from a recession narrative, but we think another shift in expectations could be under way, and a soft landing will always bring contradictory data – a slowdown but no recession." In terms of the impact on how equities will trade ahead, MS observes that the S&P rallied through July, even as its strategists highlighted rate pressures compounded by earnings that will slump with a slowdown. "As the market moves from Q3 earnings to Q4 expectations, we have seen the index sell off by about 10% as earnings revisions breadth has rolled over into negative territory," and MS' Chief Global Economist Seth Carpenter does not expect the Fed to save a market that it has pushed down; "To get a soft landing, the Fed needs the economy to slow to a pace below its potential and is engineering that slowdown through higher interest rates. But for decades, slower growth brought sharply lower rates, instead of higher rates causing the slowing." Carpenter says that the economy and the market are facing crosscurrents; "We think the economy is set up to weather the storm, but investors need to be prepared for a slew of mixed messages." MS' equity strats, meanwhile, say that the rally seen last week looks more like a bear market rally rather than the start of a sustained upswing, particularly in light of weaker earnings revisions and macro data. "The leading macro data suggests that we're in a late cycle market environment as do the internals of the equity market," MS Equity Strat Michael Wilson said, "this is historically a supportive performance backdrop for (1) traditional defensives (Healthcare, Staples and Utilities), (2) select growth opportunities (lower volatility growth, in particular, along with stocks levered to secular themes that can outweigh cyclical risks), and (3) late cycle cyclicals (Industrials and Energy)."

TODAY’S AGENDA:

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ENERGY:

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06 Nov 2023 - 09:30- Research Sheet- Source: Newsquawk

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