Despite a volatile start to the month, equities finished higher in October. The US stock market (S&P500) rose 8.0%, while the tech heavy NASDAQ was up 4%. These gains were all the more impressive given the US 10-year interest rate increased 22 basis points (bp) to 4.05%.
Data at the start of the month showed the US economy to be resilient, despite the growing concerns of a recession and the Federal Reserve (Fed) interest rate hiking cycle. Consumers continued spending, with personal spending data beating estimates. The US labour market also showed ongoing strength, with the unemployment rate falling further than expected to 3.5%.
To make the Fed’s job even harder, CPI inflation again surprised to the upside, with annual headline inflation of 8.2%. Although this was slightly down from the 8.3% reading in the prior month, the closely followed core measure (excluding food and energy) increased to 6.6% from 6.3%. The combination of a strong labour market and stubbornly high inflation will mean the Fed will need to continue tightening monetary policy by raising rates in the months ahead.
US company earnings also caused volatility, especially in some of the technology names that underwhelmed market estimates and provided more pessimistic outlooks.
By the end of the month equity markets found support, as, spurred by the European Central Bank (ECB), investors started to speculate that the Fed may be nearing a stage of slowing their hiking cycle, but this may be premature and there is a good chance this bounce was just a bear market rally which retraces soon
The UK got a new PM after Liz Truss stepped down following the budget debacle that almost caused some very serious issues for UK pension funds. The new PM is looking to be more fiscally conservative, and this has seen long maturity UK bond yields come back down more than 150bps from their peak. The GBP also recovered with the change in stance.
The ECB met, and hiked rates 75bp, given they are also still experiencing near 10% inflation. However, they did appear a little more dovish regarding future hikes. This sign of a major central bank appearing to potentially slow the tightening cycle gave global risk sentiment and stocks a boost into the end of the month.
In New Zealand, inflation data surprised to the upside with headline CPI up 7.2% on the year, versus the 6.5% expectation. Non-tradeables, which is the best indicator of domestic inflation (i.e. not including imported inflation such as food and petrol), increased 2.2% on the quarter, 1% higher than expected. This will be worrying for the RBNZ as this inflation tends to be stickier and can lead to wage-price spirals.
The RBNZ did hike rates by another 50bp early in the month taking the OCR to 3.5%, as expected, but after the high CPI reading, the market is now pricing in an 80% chance the RBNZ hike by 75bp at their November meeting. Although they will no doubt be concerned about inflation not showing signs of slowing, they will also be aware that it takes some time, potentially 12-18 months, for the hikes to flow through into the economy and consumers. This could mean they will maintain hiking in 50bp increments while they wait for the full effects to be seen.
The increased odds of a larger RBNZ hike and general risk on sentiment saw the NZD appreciate, up 3.8% vs the USD. This will be a welcomed move, not just for Kiwis looking to go on holiday, but also for the RBNZ as it can reduce the cost, and therefore inflation, of our imports.
The markets remain in an environment of uncertainty, and we expect volatility to stay elevated. The central banks are still trying to tame inflation while balancing the impacts on the economy. Adding to these risks are the ongoing geo-political issues and energy crisis in Europe.