What's moving markets
Markets provided investors with some pre-Christmas cheer during November as both equities and bonds rallied thanks to data suggesting central banks have reached the end of their tightening cycles.
Kicking off the positive momentum was the latest US Consumer Price Index reading (for October) which surprised the market by being cooler than expected. The headline rate fell to 3.2% year-on-year, led by falling energy and gasoline prices diminishing expectations of further rate rises. The US 10-year bond yield started the month at 4.77% but tumbled to 4.22%, helping boost stock market returns (lower yields mean future earnings are discounted by less). FED chair Jerome Powell tried his best to dampen the enthusiasm in markets by pushing back on the prospect for rate cuts – we’ll have to wait and see if he succeeded.
Any prospect of the US falling into a recession any time soon was blown away by stellar GDP numbers showing a 5.2% annualised increase for the third quarter, with consumer spending also increasing by 3.6%. Perhaps the so-called Goldilocks scenario (inflation falling due to tighter monetary policy, without causing a recession) can be achieved.
In October the US unemployment rate saw a slight increase of 0.1% to 3.9% - the highest rate since January 2022, and retail spending slowed. Worryingly, credit card defaults grew, along with the total amount of outstanding credit card debt rising by 4.7% (or £48bn) over the quarter.
The UK also saw a substantial decline in the year-on-year headline inflation rate – dropping from 6.7% to 4.6% (the lowest rate in two years), again largely led by falling energy costs. In a direct reflection of the US, any expectation of further rate hikes by the Bank of England were extinguished and over the month, with the UK 10-year gilt yield falling from 4.56% to 4.14%.
The GfK consumer confidence survey for November rose to -24 from the -30 recorded in October with consumers starting to feel the effects of lower inflation, or perhaps improving optimism surrounding their own finances.
Jeremey Hunt’s Autumn Statement was met by calm markets (unlike the pandemonium caused by Trussonomics of last year), with the standout change being a reduction in National Insurance contributions from April 2024.
In the Euro area, the flash CPI release showed the headline rate of inflation falling to 2.4% again as energy price pressures abated. The hallowed 2% rate now looks in sight for the European Central Bank (ECB). Despite the positive news on inflation, the third quarter saw GDP decline by 0.1%, marking the first contraction since 2020.
Among the bloc's biggest economies, GDP shrank in Germany (-0.1%), stalled in Italy and rose modestly in France (0.1%) and Spain (0.3%). The ECB expects the Euro Area economy to grow by 0.7% in 2023, as tighter financing conditions and high prices weigh on domestic demand, with foreign demand remaining subdued and the industrial sector continuing to contract, especially in Germany.
It's a mixed picture in China with strong retail sales figures and a better-than-expected economic expansion of 4.9% year-on-year in the third quarter. However, despite the People’s Bank of China’s efforts to try and stimulate the economy, the housing market remains a drag on growth. What’s clear is that until the housing market stabilises, negativity will dominate the macro backdrop.
Asset class implications
As government bond yields plunged, both equity and fixed income markets rose leading to broad based gains across asset classes and regions. At a headline level, growth as a style outperformed value, with falling yields (a proxy for borrowing) producing outsized gains. The FTSE USA had another strong month - gaining 4.77% and bringing year-to-date gains to just shy of 15%. Gains were broad based across sectors and regions throughout the month with consumer discretionary stocks leading the charge.
The FTSE All Share and the FTSE World Europe Ex UK also saw notable gains, returning 2.99% and 6.34% respectively as positive signs on inflation and expectations of an interest rate peak encouraged markets higher.
The everything rally also reverberated around Asia and Emerging markets leading to broad based gains in the regions:
- FTSE Japan rising 3.71%,
- FTSE Asia Pacific ex Japan rising 3.06%
- FTSE Emerging returning 2.53%.
Given the fall in yields throughout November, fixed income indexes also produced positive absolute returns. The FTSE Actuaries UK Conventional Gilts All Stocks index rose 2.93% following a 42bps fall in the UK 10-year Gilt yield, and from a credit perspective, the ICE BofA Global Corporate index rose 4.35%.
In our Tactical solutions we remain overweight to Global Government bonds and neutral on corporate bonds. At this stage of the cycle, our preference is for interest rate risk above credit risk as it’s still unclear whether yields offer sufficient compensation for the risk of rising defaults in a tougher macro-economic environment.
|FTSE Actuaries UK Conventional Gilts All Stocks
|ICE BofA Global Corporate
|ICE BofA Global High Yield
|FTSE All Share
|FTSE World Europe ex UK
|FTSE Asia Pacific ex Japan
Source: FE Analytics, GBP total return (%) to last month end
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