Global Equities delivered strong returns in October as markets reacted positively to the month’s inflation prints and began to price in a potential slowing in monetary tightening. The bounce was led by US equities which were further supported by the start of the Q4 earnings season. UK equities delivered positive absolute returns, but were a notable laggard among developed markets, as political uncertainty weighed on the market. Conversely, negative returns from mainland China equity dragged Emerging Markets into negative territory.
Global Government Bonds delivered negative returns in October. UK political turbulence dominated UK bond markets at the start of October, although this calmed with the appointment of new Prime Minister Rishi Sunak. In Europe, the ECB delivered a 0.75% hike and both Germany and France released modestly higher than expected CPI prints. Ten-year Bund yields were little changed on the news. Bund-BTP spreads fell after reports of possible further common issuance and the deferral of any QT announcement to December. Treasury yields rose modestly as US CPI also saw a mild surprise to the upside in September at 8.2% compared to consensus of 8.1%.
The dollar fell over the month as investors digested the possibility of a slowdown in Federal Reserve’s policy tightening. Sterling rallied as the UK rowed back from the ‘mini’ budget delivered under ex-Prime Minister Liz Truss. The Euro also strengthened over the month, although this was primarily as a result of dollar weakness. The Bank of Japan left its ultra-low interest rates policy unchanged and revised down its forecast for economic growth in the current fiscal year.
Inflation remains sticky in the US, driven by the services side of the economy. Nonetheless, signs of cooling inflation are becoming more apparent as supply chains normalise and goods demand eases. Weakening economic activity may also provide disinflationary impetus towards year-end, particularly in the Eurozone. US growth held up in Q3, but a 2023 US recession remains highly probable.
Central banks remain hawkish amid persistently high inflation and have signalled a willingness to raise rates in the face of slower economic growth. Major tightening may be limited as the effects of earlier rate hikes begin to filter into the wider economy. The market expects a total of 4.25% of Fed rate hikes in 2022, leaving policy restrictive by the end of the year. Further rate hikes are likely in early 2023 with policymakers adopting a hike-and-see approach.
Fiscal policy will have an important role in limiting broader economic challenges including the cost of living crisis. This includes targeted fiscal policy support for households and businesses in Europe and increased infrastructure investment in China.