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Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
The UK
Bank of England (BoE) Governor Andrew Bailey continued to push back against market expectations for interest rate cuts. He told Daily Focus, a news service, that the BoE "will do what it takes" to reduce inflation to its 2% target, but he added that "we are not in a place now where we can discuss cutting interest rates – that is not happening."
The US
Last week brought some good news on the inflation front. On Thursday, the Commerce Department reported that the preferred inflation gauge of the Federal Reserve (Fed), the core (less food and energy) personal consumption expenditures (PCE) price index, rose 0.2% in October, a slowdown from September. This brought its year-over-year increase down to 3.5% – still well above the Fed’s 2% target, but the lowest level since April 2021. Over the past six months, core PCE was running even slower, at an annualised rate of 2.5%.
Even before the release of the data, a noted Fed hawk, Board Member Christopher Waller, surprised investors on Tuesday by telling a Washington conference that “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to two percent.” While cautioning that work remained, he also acknowledged that “we have seen the most rapid decline in inflation on record.”
According to Reuters, Waller also told the audience that if inflation continued to moderate over the next three to five months, “we could start lowering the policy rate just because inflation is lower," stressing that "it has nothing to do with trying to save the economy. It is consistent with every policy rule. There is no reason to say we will keep it really high."
A slight change in tone from Fed Chair Jerome Powell may have helped both stocks and bonds end the week on a strong note. In a speech on Friday, Powell acknowledged that interest rates were now “well into restrictive territory.” He also warned that the Fed would raise rates again, however, if dictated by the data.
The week arguably offered some evidence that the economy may be headed toward policymakers’ goal of a “soft landing.” Personal spending rose 0.2% in September, its smallest increase in six months, while personal incomes rose at the same pace. Housing permits came in above expectations, but actual starts surprised on the downside. Weekly jobless claims ticked down, but continuing claims jumped much more than expected to 1.93 million, their highest level since November 2021.
Hopes that the economy is running neither too hot nor too cold – the so-called “Goldilocks” scenario – may have been boosted by the release on Thursday of the Fed’s Beige Book. The central bank’s periodic survey of economic activity in its 12 separate districts was split down the middle, with half reporting growth and half contraction.
Europe
Eurozone annual consumer price growth in November slowed more than expected in November to 2.4%, down from 2.9% in October and below expectations for 2.7% in a FactSet poll of economists. Underlying price pressures also eased. Core inflation, which excludes food and energy costs, dropped to 3.6% from 4.2%. Separately, the jobless rate held steady at a record low of 6.5%.
Before inflation data were released, several policymakers reiterated their hawkish view that rates would have to stay higher to contain inflation. European Central Bank (ECB) President Christine Lagarde told a committee of the European Parliament that strong wage growth and an uncertain outlook meant that “this was not the time to start declaring victory” in the fight to curb inflation. Germany’s Bundesbank President Joachim Nagel and Spain’s Pablo Hernandez de Cos reiterated that it was too early to start talking about rate cuts.
Germany’s Federal Labour Office reported that the jobless rate rose to 5.9% in November, the highest level since 2021, from 5.8% in October. The statistics office said that, in seasonally adjusted terms, the number of people employed was flat compared with September, while rising 0.6% year over year. The number of job vacancies fell. Meanwhile, retail sales grew more than expected in October, increasing 1.1% sequentially, as falling inflation appeared to boost consumer confidence.
Japan
Japan’s Prime Minister Fumio Kishida reiterated the government’s commitment to taking all necessary measures to cushion the negative impact of recent price hikes. In early November, his administration announced a new economic stimulus package worth more than USD 110 billion, aimed at boosting growth and helping households cope with the rising cost of living. The measures include cuts to income and residential taxes as well as cash handouts to low earners. During the week, Japan’s parliament enacted an extra budget for the current business year ended March 2024 to help fund the fiscal stimulus.
Bank of Japan (BoJ) board members tempered investor expectations that the central bank was getting close to pivoting away from its dovish policy stance. Toyoaki Nakamura could not say with conviction that a sustained and stable achievement of the BoJ’s 2% inflation target was in sight and stressed the need to maintain ultra-loose monetary policy for the time being. Seiji Adachi echoed these views, stating that it was appropriate to patiently continue with monetary easing.
China
Economic data for October provided a mixed snapshot of China’s economy. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction. The nonmanufacturing PMI slipped to a lower-than-expected 50.2 from 50.6 in October. Readings above 50 indicate growth from the previous month. On the other hand, the private Caixin/S&P Global survey of manufacturing activity rose to an above-forecast 50.7 in November from October’s 49.5, as new order growth rose to the highest level since June.
Chinese authorities issued a 25-point plan to step up financial support for the private sector in Beijing’s latest effort to boost business confidence. The measures aim to unblock financial channels such as loans, bonds and equity financing. Separately, the People’s Bank of China released its third-quarter monetary policy implementation report, in which it highlighted the changing structure of lending. The central bank encouraged observers to look beyond the volume of new loans as it shifts its focus to improving the efficiency and structure of loans. A slowdown in industrial profits growth pointed to persistent weakness in parts of China’s economy.
Profits at industrial firms increased by 2.7% in October from the year-ago period but slowed from September’s 11.9% gain. For the first 10 months of 2023, profits fell by -7.8% from a year ago, slowing from a -9% contraction recorded in the first nine months of the year. The latest report deepened concerns that China's recovery has yet to find a solid footing as a yearslong property sector slowdown has curbed demand across the economy. The value of new home sales by the country’s top 100 developers fell -29.6% in November from a year earlier, accelerating from the -27.5% drop in October, according to the China Real Estate Information Corp.
Australia
Nominal retail sales in Australia fell -0.2% month on month, below market expectations of a 0.1% monthly increase. Consumers might have delayed their spending to take advantage of Black Friday sales in November – a pattern that has emerged in recent years. Australia consumer price index (CPI) fell -0.3% in October, bringing the annual rate down to 4.9%, below the market consensus of 5.2%. The decline should be taken with a grain of salt though, as seasonality (travel) and government subsidies (rent assistance, power rebates) accounted for the bulk of the change. It is also noteworthy that over 40% of the CPI basket and most services were not updated in October. Australian housing prices rose 0.6% month on month in November and are now 0.7% above the Aprile 2022 peak. A further fall in new home listing was partially responsible for the increase, which led to a decrease in housing sales volume.
Markets
Last week, the MSCI All Country World Index (MSCI ACWI) rose 0.8% (9.3% in November, 17.7% YTD). November was the strongest month for MSCI ACWI since November 2020.
In the US, the S&P 500 Index closed 0.8% higher (9.1% in November, 21.5% YTD). The technology-heavy Nasdaq Composite Index advanced 0.4% (10.8% in November, 37.8% YTD). The S&P 500 and Nasdaq Composite rounded out on Thursday their best monthly gains since July 2020. Falling Treasury yields seemed to continue to boost sentiment, and a broad index of the bond market recorded its best monthly gain since 1985.
Growth stocks underperformed value stocks and large-caps underperformed small-caps. The Russell 1000 Growth Index returned 0.4% (10.9% in November, 37.2% YTD), the Russell 1000 Value Index 2.0% (7.5% in November, 6.8% YTD) and the Russell 2000 Index 3.1% (9.0% in November, 7.2% YTD).
In Europe, the MSCI Europe ex UK Index gained 1.3% (7.4% in November, 14.1% YTD), as a steep decline in inflation and falling bond yields lifted investor sentiment. Major stock indexes rose as well. Germany’s DAX Index rallied 2.3% (9.5% in November, 17.8% YTD), France’s CAC 40 Index put on 0.7% (6.3% in November, 16.8% YTD) and Italy’s FTSE MIB Index climbed 1.7% (8.1% in November, 32.5% YTD). Switzerland’s SMI Index ended up 0.1% (4.5% in November, 4.7% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.09 for EUR.
In the UK, the FTSE 100 Index tacked on 0.6% (2.3% in November, 4.7% YTD) and the FTSE 250 Index lost -0.2% (7.1% in November, 0.8% YTD). The British pound appreciated versus the US dollar, ending the week at USD 1.27 for GBP, up from 1.26.
Japan’s stock markets fell over the week. The TOPIX Index declined -0.3% (5.4% in November, 29.0% YTD) but the TOPIX Small Index advanced 0.4% (4.3% in November, 23.2% YTD). Japanese shares were subject to some profit taking after rallying in November on expectations that US interest rates had reached their peak, while a strong corporate earnings season and weakness in the yen had also provided a favourable backdrop.
Over the week, the yield on the 10-year Japanese government bond fell to 0.69%, from 0.77%, tracking recent weakness in US bond yields on dovish remarks from US Fed policymakers amid signs of slowing economic activity.
The yen strengthened to 146.8 against the US dollar from the prior week’s 149.4. This was in an environment of general weakness in the greenback, as anticipation grew that the Fed could start cutting rates next year.
In Australia, the S&P ASX 200 Index rose 0.5% (5.2% in November, 6.1% YTD) as US treasury yields continued to abate on dovish Fed speech and Australia CPI cooled in October. Australian government bond yields reversed the increase in the previous week. The Australian dollar strengthened against the US dollar by 0.3% as market started to price in an earlier Fed rate cut in 2024.
MSCI Emerging Markets Index closed 0.2% higher (8.0% in November, 5.5% YTD), with a positive contribution to performance from the stock markets of Taiwan, India, South Korea and Brazil and a negative contribution from that of China.
Chinese equities retreated as official indicators underscored concerns about the country’s fragile recovery. The Shanghai Stock Exchange Index gave up -0.3% (0.4% in November, 0.8% YTD) and the blue-chip CSI 300 Index decreased -1.6% (-2.1% in November, -7.9% YTD). In Hong Kong, the benchmark Hang Seng Index fell -4.1% (-0.2% in November, -11.7% YTD).
In Türkiye, the central bank held its regularly scheduled meeting and raised its key policy rate, the one-week repo auction rate, from 35.0% to 40.0%. While this is well above the 8.5% level, where it was as recently as May, year-over-year inflation is slightly more than 61%, so real (inflation-adjusted) interest rates are still well below 0%.
In the central bank’s post-meeting statement, policymakers noted that “domestic demand, the stickiness in services inflation and geopolitical risks” are supporting price pressures. However, they also noted that “domestic demand has started to moderate” and that factors such as “improvement in external financing conditions, continued increase in foreign exchange reserves,” and increased demand for lira-denominated assets are contributing “significantly to exchange rate stability and the effectiveness of monetary policy.”
Policymakers concluded that “the current level of monetary tightness is significantly close to the level required to establish the disinflation course. Accordingly, the pace of monetary tightening will slow down, and the tightening cycle will be completed in a short period of time.” Policymakers remain committed to bringing inflation down to 5% in the medium term and intend to keep monetary policy tight “as long as needed to ensure sustained price stability.”
In Mexico, the central bank held a press conference following the publication of its quarterly monetary policy report. T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that policymakers’ previous inflation forecasts remain intact, estimating a return to the 3% inflation target by the second quarter of 2025. This is despite a meaningful upgrade to GDP growth, with the economy seen expanding by 3.3% in 2023 (versus a 3.0% estimate in the previous report) and 3.0% next year (versus a previous projection of 2.1%).
Based on a recent research trip to Mexico City, Gifford believes that many additional growth drivers could increase Mexico's productive capacity without pressuring inflation. For example, many of the government’s infrastructure projects and nearshoring-related activities fall under this category. Importantly, central bank Governor Victoria Rodriguez Ceja mentioned that the inflation forecasts include all of these variables and others, such as fiscal expansion.
While the Board of Governors acknowledges that inflation risks are still to the upside, there’s a growing consensus that real interest rates (calculated by subtracting 12-month ahead inflation expectations from the policy rate) are too high in Mexico, even as inflation has declined significantly. In this sense, Gifford believes that many Board members are warming up to the idea of interest rate cuts as soon as the first quarter of next year.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 1.5% (3.4% in November, 4.4% YTD) – November was the strongest month for the index since May 1995 – Bloomberg Global High Yield Index (hedged to USD) 1.3% (4.7% in November, 9.8% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index 1.3% (5.4% in November, 5.5% YTD).
Powell’s comments helped push the yield on the benchmark 10-year US Treasury note down -27 basis points (bp) to 4.20% from 4.47% (down -61bp in November, up 32bp YTD), nearly a three-month low. The 2-year Treasury yield decreased -41bp, down to 4.54% from 4.95% (down -41bp in November, up 11bp YTD).
European government bond yields broadly declined as lower-than-expected inflation data raised expectations that the ECB could start cutting interest rates next year. The yield on Germany’s 10-year bund decreased -28bp over the week, ending at 2.36% from 2.64% (down -36bp in November and -21bp YTD) and falling toward its lowest level in more than four months. The yield on the benchmark 10-year Italian bond declined toward 4%.
In the UK, bond yields bucked the broader trend, rising from midweek lows on hawkish comments from policymakers. Over the week, the 10-year gilt yield decreased -14bp, to 4.14% from 4.28% (down -34bp in November, up 47bp YTD).
Issuance was in line with weekly expectations in the US investment-grade corporate bond market. All issues were oversubscribed. The continued rates rally, and expectations that liquidity will become more challenging in mid- to late December supported the performance of high yield bonds.
Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM
Michael Walsh, FIA, CFA
Solutions Strategist
Niklas Jeschke, CFA
Solutions Analyst
Eva Wu,
Solutions Analyst
202312 - 3262576
Notes
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