Executive summary:
- Japan's ruling party lost its parliamentary majority in the recent elections
- U.S. job openings fell to a three-year low
- The U.S. elections and the Fed's rate decision are key watchpoints for the week ahead
On the latest edition of Market Week in Review, Director and Senior Investment Strategist Alex Cousley discussed the results of the recent parliamentary elections in Japan. He also reviewed the latest U.S. macroeconomic data and outlined key investor watchpoints in the week ahead.
Political uncertainty rises in Japan after LDP loses majority
Cousley began with a look at Japan’s recently held parliamentary elections, where the incumbent Liberal Democratic Party (LDP) lost its majority in the 465-seat House of Representatives—the lower chamber of the country’s national legislature (the Diet). “This was the first loss for the LDP since 2009,” Cousley stated, adding that the LDP has governed the country for most of the past 70 years. He noted that the LDP’s coalition partner, Komeito, also lost seats in the Oct. 27 snap election,
As a result, a special session of the Diet will be held in the first half of November to choose a prime minister, Cousley said. “It’s unclear if current Prime Minister Shigeru Ishiba, who’s only been on the job for a month, will remain in his position after the vote,” he remarked.
Meanwhile, in a largely expected decision, the Bank of Japan (BoJ) opted to keep its benchmark lending rate unchanged at 0.25% during its Oct. 31 policy meeting, Cousley noted. He said that the Japanese yen softened a bit against the U.S. dollar the week of Oct. 28 while Japanese equities traded higher.
“At Russell Investments, we think the yen looks cheap and expect that it will act as a diversifying asset if there’s volatility in Japanese equity markets in the weeks ahead,” Cousley said. He stressed that ultimately, improvements in corporate performance—driven by a slew of corporate governance reforms—will likely remain the driving force in Japanese markets.
Is the U.S. labor market continuing to cool?
Cousley shifted to the U.S., where he examined the latest batch of economic indicators. Focusing in on the nation’s labor market, he said that the latest Job Openings and Labor Turnover Survey (JOLTS) showed U.S. job openings falling to their lowest level in over three years. “The September numbers are part of the ongoing trend in declining job openings that we’ve seen most of this year,” Cousley stated. Separately, he noted that the ADP payrolls report for September—which measures hiring in the private sector—came in a bit stronger than expected, while initial jobless claims continue to show that layoffs are limited.
Turning to corporate earnings, Cousley said that third-quarter earnings season heated up the week of Oct. 27, with several mega-cap tech names reporting results. Among the big tech companies, Google parent Alphabet reported better-than-expected results, while Meta’s results were more mixed, he said.
“It’s largely been a story of so far, so good for U.S. earnings season,” Cousley remarked, noting that third-quarter growth estimates have ticked higher to roughly 6% on a year-over-year basis. However, he said there have also been a couple of large revisions to analyst estimates for a few S&P 500 companies—including Boeing and Eli Lilly, which reported poorer trading conditions and higher research and development costs.
So, how does the latest macro data impact the economic outlook? Cousley said he believes U.S. recession risks have been moderating over the last six months, but that they still appear a bit above average—and higher than current market pricing. “This implies some asymmetry to the return outlook for now,” he said.
Key investor watchpoints for the week ahead
Cousley wrapped up by noting that the upcoming week will be very notable for financial markets, with U.S. elections on Nov. 5 and a U.S. Federal Reserve (Fed) meeting on Nov. 6-7.
The latest models suggest the race for the White House is still quite close, he noted, while on the monetary policy side, investors are anticipating a 25-basis-point (bps) cut from the Fed. “I expect that the central bank will opt for a cut of this size—as opposed to September’s supersized 50-bps cut—now that the labor market appears more balanced and inflation is essentially back at target,” Cousley stated. He concluded by adding that he also expects the Fed to cut rates by another 25 bps during its final meeting of the year in December.