As predicted by many, the Reserve Bank of Australia lifted the cash rate in early November by 0.25%, raising it to 2.85%. The RBA made it clear that although monetary policy was not set on a particular path and further tightening was probable in the near future. Yields rose in unison early in the month after messaging from central banks, particularly the US Federal Reserve, gave assurances that rates would continue to rise. However, following cooler-than-expected inflation readings, markets began to doubt how much or how quickly rates would continue to rise, and yields drifted lower as a result.
The AU3Y government bond yield rose to as high as 3.51% before ending the month at 3.17%, decreasing 13 basis points (bps). The AU10Y and AU30Y government bond yields peaked at 4.05% and 4.38%, respectively, before falling to end the month at 3.53% and 3.88%.
According to activity-based measures, growth is solid but will start to slow down as we approach the end of the year. Business conditions in the October NAB Business Survey are still elevated though there has been a slight decrease in forward orders. Continuing indications are that increased cost of living pressures and tighter monetary conditions are affecting business confidence, following the lower consumer sentiment. Retail sales rose marginally by +0.2% over the September quarter, while October sales unexpectedly fell by -0.2%.
The Australian employment market was strong in November data release, with an increase of 32,200 jobs. The unemployment rate also lowered slightly to 3.4%. There was a significant +1.2% growth in private sector wages which contributed to the September quarter Wage Price Index rising by +1%. This puts the yearly rate at +3.1%, which is the highest it has been since 2013.
November 2022 Summary
- Inflation remains elevated in the US but is starting to turn
- US Fed Chair Jerome Powell reaffirms rate hikes ahead
- US Stock markets rallied aggressively to close the month
- The US yield curve remains inverted, signalling a recession
Geopolitics continues to play a role in the market's goings. The war in Ukraine to China's Zero Covid policy could all result in a global recession. But this week, Beijing stated that they are increasing the rate of elderly vaccinations for covid, sparking investor expectations that China could wind back its Zero Covid policy. In response, Hong Kong's Hang Seng Index surged +27%, its best monthly performance since 1998.
US Fed Chair Powell discussed how supply chain disruptions can be a major cause of inflation and said that if China's Zero Covid policy starts to soften, this could ease global inflation by helping to resolve issues with supply chains.
US Stock Markets
The Materials, Industrials, and Utilities sectors had the best returns in November, contributing to the Dow's 6.0% total return. The Nasdaq 100 Index rose 5.6%, the Nasdaq Composite gained 4.5%, and the S&P500 was up 5.6%, all quoted on a total return basis.
US Treasuries
The Equity markets caught a bid on the back of falling yields, with the US10Y Treasury now at 3.60% and below its October peak of 4.25%. The shorter-term US2Y saw a yield of 4.72% (before the September CPI print), but this has since pulled back to around 4.31%. US2Y Treasury bonds currently yield more than the US10Y maturities meaning the yield curve is inverted currently.
Holiday Sales
More than 196 million Americans did some sort of shopping over the Thanksgiving weekend, according to the National Retail Federation. That is a 9.4% increase from last year's 179.8 million shoppers. Sales appear to have been strong overall. The S&P Retail Index gained +7.3%. Consumer spending has now increased for three months straight, signalling good news for the US economy since consumer spending makes up a large portion of GDP measure.
VIX
After the Consumer Price Index was released in the middle of the month and Jerome Powell spoke at the Brookings Institute, market volatility decreased. The CBOE Volatility Index (or VIX), which is often called the fear gauge, went down by almost 20% from 26.50 to 20.50 throughout November before stabilising with a value around 20 at the end of the month.
Precious Metals
Gold prices started to rebound in November, with the spot price rising as much as +9% before closing the month around +8%. The precious metal is still down -13.7% from its March high of $2050 and +3.3% for 2022 so far.
US Dollar
Rising inflation and interest rates are continuing to push the US dollar rally higher. The USD made a new two-decade high above $114 in September but has pulled back from those gains since then. The US Dollar Index is down -5% for the month of November but is still up +11% for the YTD.
Oil
Oil prices saw a 7% decline in November and have fallen significantly from the $123.70 high seen in March- which was a 14-year record. However, Oil is still higher by 7.15% YTD. The cost for unleaded gas has averaged at about $3.495 per gallon, down 26 cents or 7% since October but up 10 cents from around this time last year, where it was $3.39/gallon.
The Crypto Markets
FTX's collapse will be played out in the courts and press for a long time. This sent shockwaves throughout the crypto space on concerns of solvency and government oversite (both in the US and abroad). Bitcoin declined nearly -27% in November, making a new 52-week low of $15,363 before rallying back late in the month to close down only -16.5% but remains down over -63% YTD. The FTX situation has not caused any contagion in equity markets yet.
The Months Ahead
Despite a less-than-ideal beginning to the month, later events, such as Chair Powell's commentary on inflation, lower the chance of another 75-point basis hike. This sparked an end-of-month rally which was greatly appreciated by investors. The key issue for the market now is whether the Federal Reserve will follow through on what was indicated. Some important releases to keep an eye on are the November CPI print (13th), FOMC Rate Decision (14th) and retail sales figures (15th). With less than five weeks until 2022, we may see a late-month melt-up in Equities for a Santa Claus rally.