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Global equities (+6.3%) surged in November, ending the month with an 11.4% loss year to date. Markets remained acutely focused on slowing global economic growth and rising inflation. Stocks rallied sharply and investor sentiment improved after softer-than-expected inflation in the US and Europe fueled hopes that the US Federal Reserve (Fed) and the European Central Bank (ECB) would begin to taper their pace of rate hikes, triggering significant declines in US Treasury yields and the US dollar. In sharp contrast, Japanese inflation in October rose at the fastest pace in 40 years, testing the Bank of Japan’s (BOJ’s) resolve to maintain its ultra-easy monetary policy to support the economy amid mounting concerns that the bank is underestimating the underlying strength of price pressures. Despite a record increase in the number of COVID cases in China, Chinese stocks soared as markets were encouraged by the government’s announcement of 20 key parameters to ease its pandemic measures, which have exacted a heavy economic toll and sparked public protests. China also unveiled a sweeping rescue package for the real estate sector, aimed at addressing the liquidity crisis facing developers and temporarily easing restrictions on bank lending. Building on an initiative by the G7 to further weaken Russia’s ability to wage war on Ukraine, European Union (EU) members negotiated on a price cap for Russian oil ahead of a summit in December, when EU policymakers will aim to finalize an energy package.
US equities (+5.6%) ended sharply higher after a slowdown in consumer and producer price gains fueled a powerful rally in stocks, which was exacerbated by a frenzy of short covering and a scramble for bullish options. The core Consumer Price Index grew 6.3% year over year in October, down from 6.6% in September, while the core Producer Price Index advanced 5.4% year over year, slowing from 5.6% in September. These promising developments offered hope that inflation had peaked, firming the belief that the Fed will start to moderate the pace of interest-rate increases in December. The Fed implemented a fourth consecutive rate hike of 75 basis points (bps) in November, with Fed Chair Jerome Powell suggesting that the terminal rate will be higher than previously expected. Cryptocurrencies were battered after the dramatic collapse of FTX sparked fears of contagion across the crypto industry. Democrats retained control of the Senate, and Republicans secured a narrow majority in the House of Representatives, likely deepening the legislative gridlock and diminishing the potential for significant government policy changes during President Joe Biden’s next two years in office. Of the 99% of companies in the S&P 500 Index that had reported third-quarter earnings, the blended year-over-year earnings growth rate for the index was 2.5%, well below the 10-year average growth rate of 8.8%. The forward 12-month price-to-earnings ratio stood at 17.6.
Economic data released in November signaled that the US economy remained resilient amid strong headwinds. The labor market was broadly tight despite surging interest rates and a gloomier economic outlook. US companies reported strong hiring and robust wage increases in October, as nonfarm payrolls grew by 261,000 and average hourly earnings rose 0.4% (4.7% annually). The unemployment rate increased to 3.7%, while initial jobless claims trended higher amid an uptick in layoffs, notably among some high-profile technology companies. Spending was surprisingly strong, even as interest rates continued to soar. In October, headline retail sales advanced 1.3% — the largest gain in eight months — while consumer spending rose 0.8%, complicating the Fed’s task of curbing strong demand, which threatens to keep inflation elevated for longer. However, the sustainability of spending faces pressure from dwindling savings and greater household debt, with the personal savings rate slipping to 2.3% in October — the lowest since 2005 — and US household debt in the third quarter climbing at the fastest pace in 15 years. The Conference Board’s Consumer Confidence Index fell to 100.2 on declines in expectations and current conditions and waning plans for big-ticket purchases. The housing market remained hampered by soaring mortgage rates, with US homebuilder sentiment in November near its lowest level in a decade. In October, housing starts and existing-home sales declined further, but new-home sales unexpectedly rose.
Softer measures of demand, production, and employment pushed the Institute of Supply Management (ISM) Manufacturing Index down to 49.0 in November, indicating that the manufacturing sector contracted for the first time since May 2020. However, declines in supply-chain bottlenecks and input prices offered hope that inflation has peaked. The services sector expanded at the slowest pace for two-and-a-half years as the ISM Services Index slid 2.3 points to 54.4 in October on moderating growth in new orders and business activity. A separate preliminary survey from S&P Global signaled that services sector activity continued to decline in November; weaker demand drove new business and orders lower, while input costs increased at the slowest pace in almost two years. The National Federation of Independent Businesses (NFIB) Small Business Optimism Index fell for the first time since June amid lower sales expectations and a decline in hiring intentions, even as labor shortages remained a major problem for employers.
All 11 sectors in the S&P 500 Index (+5.6%) posted positive results. Materials (+11.8%) was the top-performing sector. Financials (+7.1%) was another notable outperformer, driven by capital markets (+9.6%). Communication services (+6.9%) rose, most notably media (+13.0%) and interactive media & services (+10.3%). Consumer discretionary (+1.0%) was the worst-performing sector, led lower by automobiles (-11.6%). Energy (+1.3%) also underperformed, as the EU weighed a higher-than-expected price cap on Russian crude, and economic slowdown threatened the demand outlook.
European equities (+7.0%) generated robust performance as stocks rallied from October’s lows. Despite some anxiety about the sustainability of recent gains given the prevailing macroeconomic headwinds, risk sentiment improved amid signs that the Fed and the ECB could slow their pace of interest-rate hikes. Equities were also supported by greater hope that China would abandon its zero-COVID policy, which could boost European companies that are leveraged to the Chinese economy. Energy price dynamics remained a key focus of European governments. Policymakers sought to reach consensus on a price cap for Russian oil, even though proposals encountered stiff criticism amid concerns that a price cap could exacerbate the global energy crisis and might ultimately prove ineffective. The risk of severe gas shortages receded thanks to mild temperatures, reduced demand, and near-capacity gas storage levels. A preliminary report showed that eurozone headline inflation rose at a slower-than-expected annual pace of 10.0% in November. Prices remained sharply elevated due to stubbornly high energy and food prices, although the report provided some assurance that the ECB would begin to scale back its pace of policy tightening as economic growth wanes.
Signs of improvements in the manufacturing and services sectors were encouraging. The contraction in Europe’s manufacturing activity moderated in November, notably in Germany, as the eurozone Manufacturing Purchasing Managers’ Index (PMI) rose to 47.1, from 46.4 in October. Orders continued to deteriorate faster than companies were cutting production, causing a rapid buildup of inventories. The preliminary eurozone Composite PMI for November showed that activity in Europe’s services sector stabilized after dropping to a 21-month low in October. In aggregate, manufacturing and services companies continued to struggle amid tighter financial conditions and the cost-of-living crisis; however, November’s PMI results signaled a softening demand downturn and easing supply constraints and price pressures. Eurozone economic sentiment rebounded for the first time since February, driven by more optimism among services firms and consumers, which outweighed further deterioration in industry confidence. Overall, improving sentiment reflected hopes that the imminent European recession may be relatively mild amid government support measures, near-capacity gas storage levels, and falling wholesale energy prices.
In the UK (+7.1%), Chancellor Jeremy Hunt unveiled a budget that included £55 billion (US$65 billion) in spending cuts and tax increases, the equivalent of 1.9% of GDP, as he sought to repair the government’s fiscal credibility with a more orthodox approach to taxes and spending. The reaction in financial markets was muted as the budget was well telegraphed before its release, and most of the fiscal consolidation will only take place from 2025 onwards, after the next general election. In Germany (+9.4%), improvements in consumer confidence and the ifo Business Climate Index bolstered market sentiment. Chancellor Olaf Scholz met with Chinese President Xi Jinping to discuss consolidating trade relations and speeding up the approval of the BioNTech COVID vaccine in China.
Pacific Basin equities (+5.7%) advanced. In Australia (+7.1%), the Reserve Bank of Australia (RBA) raised interest rates by 25 bps and signaled further tightening ahead, with the bank estimating that inflation would peak at around 8% this year. Inflation surprisingly decelerated, leading markets to anticipate another 25 bps hike in December. Consumer confidence fell to its lowest level since April 2020, and business confidence weakened as higher interest rates and surging inflation weighed on the nation’s economic outlook. Unemployment unexpectedly fell to 3.4% — the lowest level since 1974 — driven by a surge in full-time employment. A stronger labor market caused wages to rise at the fastest pace in almost a decade, although the 3.1% annual increase in pay was far below the 7.3% increase in consumer prices for the period. Retail sales unexpectedly slipped for the first time this year as the impact of inflation and rising interest rates curtailed consumer spending. A meeting between Prime Minister Anthony Albanese and Chinese President Xi Jinping offered hope that China would lift trade sanctions on Australia.
Hong Kong (+23.8%) equities skyrocketed from depressed levels after China indicated that COVID travel measures will be eased. Stocks were also boosted by slowing inflation in the US, which potentially signaled prices had peaked. The Hong Kong Monetary Authority raised its benchmark interest rate for a sixth straight time, with the 75 bps hike matching that of the US Fed in order to stabilize the Hong Kong dollar’s peg to the US dollar. Hong Kong’s property market slump accelerated as home prices fell by the most since 2016, dropping 14% from their 2021 peak. In October, exports slid for the sixth consecutive month, declining 10.4% from a year earlier amid waning global demand. Exports to China fell 12.9%, while shipments to the US dropped 19.5%. Imports were down 11.9% year over year, far worse than consensus estimates of 6.4%. The trade deficit fell to HK$20.9 billion, compared with the HK$44.9 billion deficit a month prior.
In Japan (+3.0%), a weak yen and elevated energy costs drove core inflation to a four-decade high of 3.6% in October, challenging the BOJ’s views that cost-push inflation is only temporary and additional stimulus is needed to ensure stability in price growth. Unemployment fell modestly, to 2.6%, and the jobs-to-applicants ratio climbed to 1.35 in October, signaling a strengthening labor market that could keep upward pressure on wages. Household spending increased for the first time in three months despite growing concerns about the impact of inflation on consumer spending. In October, a weakening global economic backdrop drove industrial production down for the second consecutive month; factory output fell 2.6% from September, worse than consensus estimates for a 1.5% decline. A historic slide in the yen pushed up the costs of imports, causing Japan’s negative trade deficit to widen for the fifteenth consecutive month, the longest streak since 2015. Exports gained 25.3% year over year, driven by demand for cars and semiconductor parts. Third-quarter GDP showed that Japan’s economy unexpectedly contracted by 1.2%, as recession risks, a weak yen, and surging import costs strained household consumption and businesses.
Emerging markets (EM) equities (+11.7%) ended sharply higher, led by strength in China. Within EM, Asia and Europe, the Middle East, and Africa (EMEA) rose, while Latin America ended lower.
Asia (+15.2%) generated robust returns, led by China (+28.4%), where equities registered their largest monthly gain since 1999. Stocks surged from deeply depressed levels after the government relaxed some of its strict pandemic rules and announced a campaign to boost vaccinations among the elderly, driving markets to anticipate a gradual unwinding of stringent zero-COVID policies that have roiled the economy and sparked an unprecedented wave of protests. An explosion of COVID cases dented China’s near-term economic outlook, although markets grew increasingly bullish on stocks amid expectations that growth will accelerate in 2023 as the economy reopens. However, economic data released in November was primarily weaker than expected; industrial production slowed, retail sales fell, and the manufacturing and services sectors contracted. Home prices continued to drop, and real estate investment declined at an accelerated rate as regulators unveiled a 16-point plan to revive the ailing property sector, including measures to boost the liquidity of developers and temporarily ease restrictions on lending. President Jinping reengaged with Western leaders at the G20 summit in Bali, a positive step in restoring communication channels and tempering geopolitical tensions. Taiwan (+17.2%) and South Korea (+6.4%) advanced, bolstered by expectations for a revival in semiconductor stocks. In Taiwan, President Tsai Ing-wen resigned after her ruling Democratic Progressive Party suffered a landslide loss in local elections. The main opposition party, Kuomintang, which traditionally favors closer ties with China, gained significant ground. South Korea’s central bank softened its stance on inflation amid mounting evidence of an economic slowdown.
EMEA equities (+2.0%) ended higher. Turkey (+22.5%) soared as runaway inflation led domestic investors to pile into stocks for protection against unconventional central bank policies and a weakening currency. President Recep Tayyip Erdoğan helped to solidify a deal to reopen a safe-passage corridor for Ukrainian grain exports. South Africa (+10.6%) announced plans to invest US$8.5 billion in climate financing from the Just Energy Transition Partnership, while the central bank increased policy rates by 75 bps, to 7%, as inflation reaccelerated in October. Equity markets in the Persian Gulf were pressured by lower oil prices.
Latin American equities (-0.4%) moved lower. Brazil (-2.6%) declined on concerns that President-elect Luiz Inácio Lula da Silva’s spending plans may increase budget deficits. Mexico (+3.5%) rose, with the central bank hiking rates 75 bps, in line with the US Fed. Peru (+12.6%) generated outsized returns after central bank President Julio Velarde announced that the country is nearing the end of its rate-hiking cycle.
Fixed income sectors rallied amid a spate of easing inflation headlines and US Fed rhetoric aimed at softening the expected pace of interest-rate increases.
US economic data was mixed. Ongoing inflation and higher interest rates weighed on consumer sentiment, while headline retail sales rose more than expected. The NFIB Small Business Optimism Index fell on account of a bleak future sales and business conditions outlook. The unemployment rate rose moderately, and jobless claims climbed amid layoffs in the technology sector. The manufacturing PMI contracted, and industrial production eased on slowing demand hampered by higher interest rates. The services PMI also contracted as rising costs hindered demand. Durable goods orders advanced, bolstered by cars, aircraft, and business equipment orders. Building permits and housing starts each declined, with weakness largely driven by the single-family-unit segment. The NAHB homebuilder index recorded declines across buyer traffic, sales, and sales expectations components. New-home sales rebounded unexpectedly amid strong demand in the southern states post-hurricane Ian. The eurozone reported tepid GDP growth in the third quarter, with output shrinking in most member countries, while supply-chain pressures eased. Germany’s manufacturing PMI contracted for a fifth consecutive month, hampered by high inflation and economic uncertainty. The UK’s third-quarter GDP shrank on waning manufacturing and retail activity. China’s industrial production and retail sales lagged amid a surge of new COVID-19 cases. Global recession fears took a toll on the country’s exports. Japan’s economy shrank in the third quarter owing to declining consumer and business spending as rising inflation and a weaker yen lifted import costs. Australia’s consumer confidence hit a two-year low on the rising cost of living.
Major central banks continued to raise rates. The Fed hiked rates by 75 bps and signaled a slower pace of rate hikes. The Bank of England provided dovish guidance, the Reserve Bank of New Zealand released a hawkish statement, and, together with the Riksbank, hiked rates by 75 bps. The Reserve Bank of Australia and Norway’s Norges Bank hiked rates by 25 bps. UK Chancellor Jeremy Hunt unveiled an Autumn Fiscal Statement that included fiscal tightening. The People’s Bank of China cut the reserve requirement ratio by 25 bps.
Most global sovereign yields declined on signs of easing inflation across major economies. In the US, a lower-than-expected inflation print fueled a Treasury bond rally. Fed Chair Powell signaled that a downshift in the pace of hikes is likely in December. In the UK, the rate hike was accompanied by a dovish central bank statement. Fiscal consolidation in the budget statement and slowing activity indicators also contributed to the rally in gilts. Eurozone yields dropped following below-consensus CPI data, despite hawkish rhetoric from ECB policymakers and an anticipated rate hike in December. In EM, yields fell substantially in Poland after central bank members indicated an economic slowdown could allow for potential rate cuts, even as inflation remained uncomfortably high. In China, anticipation of a potential reopening led to a sharp sell-off in bonds. The Bloomberg TIPS index returned 1.83% on a total return basis and the 10-year breakeven inflation rate decreased by 14 bps, to 2.37%, during the month.
Global credit bonds outperformed duration-equivalent government bonds as spreads tightened. Within the securitized sectors, agency mortgage-backed securities and commercial mortgage-backed securities outperformed, while asset-backed securities underperformed duration-equivalent government bonds. Within EMs, local markets debt (+7.11%) underperformed external debt (+7.59%), in US-dollar terms. Spread narrowing contributed to results within external debt, and the movement of US Treasury yields also had a positive impact. The appreciation of EM currencies drove positive performance in local markets, and the movement of EM rates also helped results.
The US dollar declined versus most major currencies after a lower-than-consensus US CPI reading, dovish rhetoric from Fed Chair Powell, and reports of the relaxation of COVID-19 measures in China. The Japanese yen rallied on expectations of the Fed’s slower pace of rate hikes. Governor Haruhiko Kuroda confirmed his term would end in April, increasing the anticipation of a possible change in the BOJ’s policy in 2023. The euro was supported by lower energy prices and better-than-expected eurozone economic data. Dovish Fed rhetoric and further signs of loosening restrictions in China supported most EM and commodity-linked currencies. The New Zealand dollar rallied given no pivot signs from the Reserve Bank of New Zealand amid elevated core inflation and inflation expectations, a tight labor market, and a developing wage-price spiral. The Reserve Bank of New Zealand hiked rates and delivered hawkish guidance while projecting that policy rates would peak at a higher rate than previously assessed.
Commodities (-1.7%) ended the month lower, led by a decline in energy (-4.3%). US natural gas (+3.4%) rose on fears that a potential US rail strike could disrupt supplies. Gasoline (-2.9%) slipped. Crude oil (-5.1%) led the petroleum distillates lower as the EU weighed a higher-than-expected price cap on Russian crude, and slowing economic growth threatened the demand outlook. OPEC further cut its forecasts for global demand in the fourth quarter, and the International Energy Agency indicated that global oil consumption is poised to contract by 240,000 barrels a day this quarter compared with a year ago, weighing on heating oil (-4.2%) and gas oil (-6.8%).
Industrial metals (+12.2%) was the best-performing sector. Recent developments in China signaled that the economy is heading toward a reopening sometime next year, which appeared to support the broader metals complex. Nickel (+24.0%) spiked during the month on news of production cutbacks at the Goro mine in New Caledonia, one of the world’s largest deposits, in addition to a report of a blast at a nickel plant in Indonesia, which was later denied by the owner of the operation. Zinc (+12.7%) and lead (+11.3%) rallied, driven by speculation that Chinese protests will likely spur an accelerated shift away from zero-COVID policies, which would support demand. Aluminum (+11.0%) benefited from falling Chinese stockpiles and ongoing production issues at smelters. Inventories of aluminum ingots reportedly dropped during the month, hitting six-year lows. Snapping a string of seven straight monthly declines, copper (+10.4%) registered its largest monthly gain since April 2021 on the back of greater optimism around China’s loosening of zero-COVID policies.
Precious metals (+7.4%) rallied in November as the US dollar weakened amid indications that the Fed is prepared to slow its pace of tightening and signs that China may begin to loosen its tough zero-COVID policy. Silver (+13.5%) ended higher, while gold (+6.8%) recorded its biggest monthly gain since May 2021, following seven straight months of declines.
Agriculture & livestock (-1.4%) ended the month lower. Cotton (+20.4%) rallied on an improved demand outlook amid speculation that China might ease its zero-tolerance policy on COVID. Sugar (+9.6%) rose sharply due to anxiety that supplies will tighten, mainly in top exporter Brazil; rain in the center-south region of the South American nation, the main growing area, slowed the pace of cane harvesting and sugar-loading operations, boosting prices. Cocoa (+7.7%) registered good gains after a strike by dockworkers in the Côte d’Ivoire threatened to significantly reduce global cocoa supplies. Soybeans (+3.9%) advanced to their highest level since September, supported by hot and dry weather in parts of South America. Live cattle (+1.1%) and feeder cattle (+0.9%) were modestly higher amid concerns about tightening US supplies, as deepening drought conditions forced cattle producers to cull herds due to high feed costs and a lack of available hay. Coffee (-2.3%) fell as the supply outlook improved, with the impact of rains increasing production expectations in top producer Brazil. Lean hogs (-3.0%) slipped, pressured by worries about Chinese demand for US pork and expectations of a seasonal slide in wholesale ham prices. Corn (-4.1%) and wheat (-10.4%) ended lower on reports that the UN-brokered deal allowing exports of Ukrainian grain from the Black Sea is set to be extended for 120 days. Ukraine, a major global exporter, has shipped more than 11 million tons of crops through the Black Sea since the deal came into force, led by corn and wheat cargoes.
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