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Global equities (+6.1%) rebounded in October, ending the month with a 16.7% loss year to date. Developed market equities registered strong returns, while emerging markets were dragged lower by China. Chinese equities fell sharply as markets grew increasingly anxious about the state of China’s economy and the direction of governance and policy following a reshuffling in President Xi Jinping’s leadership team. Purchasing managers’ indices (PMIs) for October indicated that global economic growth continued to slow, pushing the world’s economies closer to recession. A combination of strong labor markets and the unrelenting rise in inflation kept most central banks on track for additional interest-rate hikes. However, the Bank of Japan (BOJ) maintained its ultra-easy policy settings even as core inflation accelerated to an eight-year high and a slumping yen pushed up import costs. Global supply-chain disruptions eased, although geopolitical tensions heightened as the war in Ukraine escalated and global trade relations were stressed. The US government published a sweeping set of export controls on advanced computing and semiconductor manufacturing technologies to China, which could amount to the largest shift in US policy on technology exports to China since the 1990s. OPEC+ agreed to its biggest oil production cut since the onset of the pandemic, slashing output by two million barrels per day. The European Commission proposed new measures to improve stability in Europe’s gas markets and to mitigate the impact of high prices on households and businesses.
US equities (+8.1%) finished sharply higher in a volatile month. The S&P 500 Index staged a spectacular rally after falling to a multiyear low on October 10 against a backdrop of high inflation, surging borrowing costs, and uncertainty about corporate earnings. Futures markets signaled the belief that the US Federal Reserve (Fed) would begin to scale back its aggressive pace of interest-rate hikes in December, although persistently high inflation increased the risk that the Fed could raise rates to a higher terminal level and keep them elevated for longer than investors anticipate. Value stocks significantly outperformed their growth counterparts after some of the largest technology companies reported disappointing earnings and weaker forecasts for the fourth quarter. US consumer inflation, excluding volatile food and energy prices, rose to a 40-year high in September; elevated shelter costs drove the core Consumer Price Index up 6.6% year over year, keeping the Fed on track to lift interest rates by 75 basis points (bps) in November. Third-quarter GDP grew at a larger-than-expected 2.6% annual rate thanks to higher exports and a shrinking trade deficit, but consumer spending — the main engine of the economy — grew at a slower pace compared to the second quarter. At the end of October, 52% of companies in the S&P 500 Index had reported third-quarter earnings. The blended year-over-year earnings growth rate of the index was 2.2%, well below the 10-year average of 8.8% and the lowest since the third quarter of 2020. The forward 12-month price-to-earnings ratio stood at 16.3.
Economic data released in October indicated softer momentum in the US economy. Despite aggressive rate hikes, employers continued to hire at a solid, albeit more moderate pace. In September, nonfarm payrolls grew by 263,000, while the unemployment rate dipped to 3.5%, partly due to a decline in the labor force. Wages rose at a slightly slower pace, with average hourly earnings decelerating to 5.0% year over year, from 5.2% in August. Companies remained hesitant to lay off workers amid tight labor supplies, keeping initial jobless claims in October near historic lows. A strong labor market and robust wage gains aided consumer spending; inflation-adjusted spending on goods and services rose at a stronger-than-expected 0.3% monthly pace in September. Following an upwardly revised gain of 0.4% in August, retail sales were unchanged in September as consumers cut back on purchases of big-ticket items. High inflation and surging interest rates strained consumer confidence. The Conference Board’s Consumer Confidence Index fell 5.3 points in October to 102.5, well below forecasts of 105.9, driven by weaker perceptions of current economic conditions. Mortgage rates soared to a 20-year high, battering the housing market. New-home construction along with pending, new-, and existing-home sales fell in September. In October, US home-builder sentiment declined for the 10th straight month, hitting its lowest level since the onset of the pandemic.
The manufacturing sector stagnated in October as the Institute of Supply Management (ISM) Manufacturing Index dipped to 50.2 —the lowest level since the second quarter of 2020. Measures of demand weakened, although inflation pressures eased amid declining raw materials prices and improving supplier delivery times. Solid growth in business activity and new orders underpinned a healthy services sector expansion in September, with the ISM Services Index ending the month at 56.7. Services employment advanced to the highest level in six months, while a fifth consecutive decline in prices paid continued to highlight moderating cost pressures. A separate preliminary survey from S&P Global signaled an accelerating decline in services sector output in October. The National Federation of Independent Business’s Small Business Optimism Index rose slightly to 92.1 in September following an outsized improvement in August, although the index is still depressed.
All 11 sectors in the S&P 500 Index (+8.1%) posted positive results. Energy (+25.0%) was the top-performing sector as the price of oil rose. Financials (+12.0%) was another notable outperformer, driven by banks (+13.5%). Health care (+9.7%) rose on strength across industries, particularly pharmaceuticals (+9.3%), health care providers & services (+11.3%), and biotechnology (+14.3%). Communication services (+0.1%) was the worst-performing sector, led lower by interactive media & services (-7.4%). Consumer discretionary (+0.2%) also underperformed, weighed down by automobiles (-10.2%).
European equities (+6.1%) registered good returns amid heightened volatility in stocks and risk sentiment. Oversold conditions and pervasively negative sentiment served as contrarian buy signals, although markets remained wary about tightening financial conditions, heightened geopolitical tensions, and uncertainty about the trajectory of interest rates. The European Union (EU) approved a new round of sanctions on Russia, including a price cap on the maritime transport of Russian crude oil (with certain exemptions), in an effort to constrain Russian funding while also mitigating the potential for fuel shortages and blackouts this winter. A sharp pullback in European natural gas prices was a silver lining in the latest inflation report, which showed that annual eurozone inflation rose to a record high of 10.7% in October. Despite a severe cost-of-living crisis and a looming recession, unrelenting price increases forced the European Central Bank (ECB) to raise interest rates by 75 bps and scale back its targeted longer-term refinancing operations, which provide European banks with attractive borrowing conditions. Dovish tones from the ECB and the Bank of England (BOE) prompted markets to anticipate a deceleration in the pace of rate hikes, but subsequent reports of higher-than-expected inflation in Germany, France, and Italy in October could sway the ECB to keep raising rates aggressively.
Europe’s manufacturing sector contracted for the fourth consecutive month and at the fastest rate since 2012; the Eurozone Manufacturing PMI dipped to 46.4 in October as output and new orders fell at a near-record pace and export demand sank. Preliminary Eurozone Composite PMI data showed that services sector activity also contracted at an accelerated rate in October amid the rising cost of living and economic uncertainty. The weaker-than-expected composite PMI reading marked the fourth straight month of contraction in the index, increasing the likelihood of a European recession. Eurozone economic sentiment deteriorated to a two-year low, with a slight pickup in consumer confidence offset by declining industry and services confidence.
Germany’s (+8.4%) economy remained on the cusp of recession, even though GDP growth of 0.3% in the third quarter exceeded expectations. Some European countries voiced concerns that Germany’s €200 billion energy stabilization could cause economic and social fragmentation in the EU and called for a more coordinated response to the energy crisis. In the UK (+2.8%), Liz Truss was forced to resign after her pro-growth plans and mini-Budget agenda of unfunded tax cuts caused massive capital outflows and damaged the government’s reputation. Chancellor Jeremy Hunt’s decision to reverse Truss’s budget policies and bring forward a more orthodox approach to tax and spending helped to stabilize UK debt markets and the currency. Rishi Sunak was appointed prime minister and now faces the challenging task of restoring the government’s credibility and putting the UK’s longer-term finances on a sustainable footing. The BOE confirmed that it would begin quantitative tightening on November 1 and is expected to raise interest rates by 75 bps in November.
Pacific Basin equities (+3.9%) rose in October. In Australia (+5.8%), the Reserve Bank of Australia (RBA) surprisingly slowed its pace of policy tightening in order to assess the impact of higher interest rates on household spending. This dovish shift contrasted with more aggressive policies from most other developed market central banks. The RBA’s 25 bps rate hike broke a streak of four consecutive 50 bps increases and lifted the cash rate to 2.60%, with RBA Governor Philip Lowe highlighting that inflation is lower compared to other countries and that the pace of wage growth isn’t sufficient enough to sustain inflation at the bank’s target band of 2% – 3%. The RBA also forecast inflation to peak in late 2022 as global supply pressures ease and commodity prices decline. In September, the unemployment rate held steady at 3.5%, but job growth of only 900 was significantly lower than expectations of 25,000, potentially justifying the shift toward slower rate increases.
In Japan (+5.7%), Prime Minister Fumio Kishida unveiled ¥29.1 trillion (US$197 billion) in stimulus to cushion the effects on households of high commodity prices and a weak yen. The BOJ maintained its ultra-loose policy amid lackluster consumer demand and slow wage growth. However, a record trade deficit and broadening inflation pressures — exacerbated by a precipitous decline in the yen — tested the BOJ’s resolve and increased speculation that the bank will tweak its dovish stance in the months ahead. Producer price inflation unexpectedly rose at a quicker pace, and the core CPI accelerated to an eight-year high of 3.0% in September, exceeding the BOJ’s 2.0% target for the sixth consecutive month. Japan’s Trade Union Confederation is expected to demand wage hikes of around 5% in the spring of 2023, which, along with Kishida’s call for higher wage growth, heaps pressure on companies to increase salaries. Third-quarter industrial production showed that factory output rose 5.9% — a positive sign for Japan’s ongoing recovery from the pandemic. However, industrial production for September slipped for the first time in three months, dropping 1.6% on weaker auto output. Retail sales in September increased for the third straight month, growing 1.1%, while the unemployment and labor force participation rates ticked up slightly.
In Hong Kong (-12.2%), the CPI in September jumped above forecast to a seven-year high of 4.4% year over year. Inflation is expected to remain elevated but restrained due to a slow recovery in demand and without a full reopening internationally and with China. Hong Kong’s Chief Executive John Lee announced measures aimed at stemming the city’s “brain drain,” with more than 140,000 people leaving the city over the last two years. A surprisingly large contraction in third-quarter GDP, which fell 2.6% from the prior quarter and 4.5% year over year, highlighted that reopening alone was unable to counter global economic headwinds. Deteriorating foreign demand and disruptions in transportation to China drove exports down 9.1% in September — the fifth straight monthly drop. Combined with a 7.8% decline in imports, the trade deficit ballooned to HK$44.9 billion (US$5.7 billion). The unemployment rate fell to 3.9% from 4.1% in the prior month.
Emerging markets (EM) equities (-2.6%) dipped in October. Within EM, Latin America and Europe, the Middle East, and Africa (EMEA) rose, while Asia ended lower.
Latin American equities (+7.2%) surged on broad-based strength in markets across the region. Luiz Inácio Lula da Silva defeated President Jair Bolsonaro in Brazil’s (+5.4%) tightly contested, divisive presidential election, cementing Latin America’s shift toward leftist governments. Mexico (+12.4%) was aided by lower-than-expected headline inflation in the first half of October, which offered some hope that price increases may be peaking. In Colombia (+14.9%), turmoil in the foreign exchange and local bond markets forced the finance minister to scale back some of the public spending proposals of President Gustavo Petro.
EMEA (+4.8%) pared back most of September’s steep decline. In Egypt (+25.9%), funding deals with the IMF and several countries secured support for the struggling economy. Turkey (+23.5%) raced higher; the Central Bank of Turkey lowered interest rates but signaled that its highly accommodative monetary policy stance may be nearing an end. Poland (+12.1%) surged after the central bank unexpectedly held rates steady as economic conditions worsened. A standoff between the EU and Poland over rule-of-law violations threatened to freeze billions in EU funding to Poland, while the impact of the war in Ukraine dimmed the prospects for a recovery and drove estimates for economic growth in 2023 sharply lower.
Asian equities (-5.0%) declined as China (-16.4%) plummeted for the second consecutive month. President Xi Jinping clinched a third term in office and appointed a new team of loyalists that further consolidated his power. The sharp sell-off in Chinese stocks appeared to be driven by a confluence of factors, including dwindling confidence in the country’s property market, the economic impact of a zero-COVID strategy, uncertainty about government policies, and disruptions from a decoupling with the US. Third-quarter GDP grew at a better-than-anticipated 3.9% year over year, while other economic data released in October was mixed. Despite efforts by major state-owned banks to stabilize the currency market, the Chinese yuan fell to the lowest level since 2008, reflecting widening policy divergence between the Fed and the People’s Bank of China, weaker economic growth expectations, and COVID disruptions. Taiwan (-3.7%) fell amid concerns about China’s resolve for reunification and after semiconductor stocks sold off after the US announced export controls on chip-making technology to China. In India (+4.4%), resilient domestic demand continued to support economic activity. Strong inflows from the country’s fund managers, who were bullish on India’s growth prospects, helped to offset outflows from foreign investors.
Most fixed income spread sectors generated positive excess returns, supported by an improving political backdrop in the UK, declining gas prices in Europe, and expectations that major central banks will soon shift away from rapid interest-rate hikes.
US economic data was mixed. Recession worries and ongoing inflation pressures weighed on current condition measures of consumer confidence. Business inventories of unsold goods rose as inflation and rising interest rates hurt demand. The labor market remained healthy; nonfarm payrolls advanced at a solid pace, particularly in the leisure and hospitality sectors, and jobless claims remained low. The manufacturing PMI and regional manufacturing surveys declined as business activity slowed. Durable goods orders rose thanks to gains in autos and transportation equipment. Mortgage rates spiked to a 20-year high, further weighing on housing market activity. The National Association of Home Builders Index fell to its lowest level since the onset of the pandemic, housing starts and home sales tumbled, while building permits recovered modestly. Eurozone investor confidence declined beyond expectations, and the manufacturing PMI slid further into contraction as inflation pressure persisted. In Germany, the ZEW indicator of current conditions and the ifo Business Climate Index fell amid an unfavorable outlook for domestic growth and concerns about energy prices. In the UK, the cost of living spiked and core inflation accelerated above forecast. China’s economy expanded more than anticipated in the third quarter despite the economic strains of COVID restrictions. Japan’s job availability remained robust, but a surge in imports, exacerbated by a weaker yen, overwhelmed export growth. The unemployment rate in Canada and Australia remained steady.
Major central banks continued to raise rates, although some scaled back the magnitude of hikes. Fed rhetoric on future policy was perceived as an indication of a potential pivot on the trajectory of interest-rate hikes. The RBA and the Bank of Canada hiked rates by 25 bps and 50 bps, respectively, which was below market expectations. The ECB and the Reserve Bank of New Zealand lifted rates by 75 bps and 50 bps, respectively. UK government bond prices began to recover after the new UK chancellor reversed the tax cut plans of former Prime Minister Liz Truss. Japan’s Ministry of Finance reportedly intervened in the foreign exchange market to support the yen.
Global sovereign yields generated mixed results. US nominal yields ended higher, led by inflation breakevens, while real yields declined over the month. US Treasury yields rose after inflation surprised to the upside. Following the appointment of UK Prime Minister Rishi Sunak, gilt yields declined to levels last seen before the ill-fated mini-Budget. The bund yield curve flattened as the ECB raised policy rates and projected additional hikes to fight inflation. Italian spreads to bunds tightened amid the possibility of further common EU issuance and the deferral of quantitative tightening. Australian yields fell after the RBA implemented a lower-than-expected rate hike. Canadian yields rose less than US yields, with the Bank of Canada unexpectedly slowing the pace of rate hikes. The Bloomberg TIPS index delivered a total return of 1.24%, and the 10-year breakeven inflation rate increased by 36 bps, to 2.51%, during the month.
Global credit outperformed duration-equivalent government bonds. Within the securitized sectors, agency mortgage-backed securities performed in line with duration-equivalent government bonds, while commercial mortgage-backed securities and asset-backed securities underperformed. Within EM, local markets debt (-0.88%) underperformed external debt (+0.15%), in US-dollar terms. Spread narrowing contributed to positive results within external debt, while movement in US Treasury yields had a negative impact. Depreciation in EM currencies drove negative performance in local markets, while movement in EM rates helped results.
The US dollar ended mixed versus most major currencies. Anticipation of a policy pivot by major central banks contributed to market movements. The Japanese yen weakened despite currency market intervention by the Ministry of Finance. Most higher-beta, commodity-linked currencies (New Zealand dollar, Norwegian krone, Canadian dollar) rose on expectations that the Fed might discuss a slower pace of rate hikes at its November meeting. The British pound rallied after Chancellor Hunt announced a more conservative approach to taxes and spending, strengthening further after Rishi Sunak was appointed the new prime minister. The euro was volatile amid signals that the ECB will continue to hike rates, even as weak economic data fueled concerns about a potentially deep recession in the eurozone. EM currencies ended mixed. The Chinese yuan declined amid uncertainty about the future policy of President Jinping’s new government and anxiety about China’s strict COVID controls, property market woes, and geopolitical risks. Most Latin American currencies gained, with the Colombian peso the notable exception.
Commodities (+6.7%) rallied in October, with three of the four sectors generating positive returns. Energy (+10.7%) surged as EU sanctions on Russian oil exports and production cuts by OPEC+ drove an impressive rally across the petroleum complex during the month. Crude oil (+11.1%) led the petroleum distillates higher, supporting heating oil (+23.6%), gas oil (+14.9%), and gasoline (+13.3%). US natural gas (-10.2%) was pressured by forecasts for warmer-than-normal temperatures in the Midwest and the East Coast.
Industrial metals (+0.4%) saw mixed performance within the complex. Lead (+4.3%) gained as inventory at London Metal Exchange (LME) warehouses sank to the lowest level in over 20 years. Aluminum (+3.4%) rose on the prospect of a complete US and LME ban on supplies from Russia, and nickel (+3.4%) also benefited from possible sanctions on Russian metals. Copper (-1.0%) ended lower, with dwindling supplies in China offset by lackluster global demand. Zinc (-8.8%) fell sharply as China’s slumping economic activity reflected weaker demand, while strength in the US dollar made the commodity more expensive.
Precious metals (-1.4%) declined for the seventh consecutive month. Silver (+0.7%) benefited from greater demand for perceived safe-haven assets and its widespread use in industrial applications. Gold (-1.6%) ended lower amid speculation that the Fed will keep tightening monetary policy aggressively, which drove the US dollar higher and pushed gold down more than 20% from its March peak.
Agriculture & livestock (+0.6%) finished slightly higher. Despite a bearish outlook for global economies, lean hogs (+11.8%) surged on news of declining production in the US, China, and Europe. Live cattle (+4.0%) and feeder cattle (+2.7%) advanced amid concerns about tightening US supplies, as deepening drought conditions in the southern plains forced cattle producers to slaughter herds due to a lack of feed and water. Soybeans (+3.5%) and corn (+2.4%) ended higher on fears that shipping disruptions could restrain supplies; trucker protests in Brazil impeded transportation, while dwindling water levels on the Mississippi River, where more than half of all US soybean exports travel, hampered shipments. Sugar (+2.0%) rose amid beliefs that supplies could tighten, with rain in a key growing region of Brazil — the world’s top exporter — slowing the pace of cane crushing and boosting prices. Cocoa (-0.5%) ended slightly lower, while wheat (-3.1%) slid on prospects for a renewal of Ukraine’s grain-export deal. Cotton (-15.4%) continued to decline; the demand outlook weakened, the strong US dollar made cotton more expensive internationally, and shipping constraints on the Mississippi river threatened to cause a buildup of supplies. Coffee (-19.5%) plunged, with favorable weather in top producer Brazil improving the supply outlook.
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