Volatility was at the forefront in October, with bond yields rallying on a surprisingly hawkish US Federal Reserve, which caught the market offside after many thought inflation had peaked. Equity markets found some support after the selloff in September, with many benchmark indices posting their best monthly performance in some time. In Australia, the bond market rose by +0.92% (Bloomberg AusBond Composite 0+ Yr Index).
UK yields fluctuated widely due to political instability and policy changes, while US rates rose because of hawkish guidance from the Federal Reserve. However, UK fiscal policy reversal and a new Prime Minister, along with early signs that the global tightening cycle was slowing down, caused UK yields to fall towards the end of the month. The UK3Y government bond yield reached as high as 3.76% before closing the month 23 points lower at 3.29%. Similarly, UK10Y and UK30Y government bonds started at 4.20% and 4.53% but dropped to 3.76% and 4.07% by the end of the month, respectively.
Although Australian data suggests growth in the September quarter, headwinds such as falling confidence, tighter monetary conditions and increasing cost of living pressures may be causing a decline in activity. The prelim data shown in the PMI (October S&P Global Australian Composite) dropped to 49.6 from 50.9 in September, signifying potential contraction rather than growth.
Total employment in Australia rose by only 900 in September, which is lower than the expected 25,000 gain. Both the unemployment and participation rate remained at 3.5% and 66.6%. Based on these labour indicators, it seems like forward demand may soon begin to soften from its current very strong levels.
October 2022 Summary
- Equity Markets rallied despite rising inflation figures
- Volatility in credit and bond markets remained near record highs
- Oversold conditions in markets help spur a relief rally in October
- Currency wars continued, with many Central Banks intervening to support their currency against the USD
- S&P 500 earnings growth was the lowest since Q4 2020 despite support from Energy markets
Equity Markets
October was a banner month for stocks, as value stocks outperformed growth and earnings season kicked into high gear. The market seems to be taking some support from the idea that the Fed could soon begin scaling back on its tightening program in the months ahead. With a 75bps interest rate hike almost certainly happening at the November 2 meeting, the market will focus its attention on the language Jerome Powell uses regarding taking a break from policy decisions to assess their impacts. Futures markets are estimating that there will be a 50bps interest rate hike in December, followed by another 25bps hike in January 2023. In addition, the Bank of Canada raised rates 50bps less than what was anticipated, while the ECB also showed some reticence towards large hikes. Because of this, it's possible the Fed could decelerate its own pace.
All 11 US Equity Market sectors experienced growth in October, with Energy stocks having the best performance at +25.0% total return. While the Industrial and Financial sectors closely followed with +13.9% and +12.0%, respectively. Both Consumer Discretionary and Communications stocks only grew by +0.2% and +0.1%.
Geopolitics
The war in Ukraine is still ongoing, and Russia has pulled out of a deal that would have allowed grain shipments from Ukraine. If Russia doesn't change its mind, this could lead to an increase in global grain prices. This would be detrimental for many countries where people are already protesting the cost-of-living increases. Liz Truss stepped down as UK Prime Minister in October after her cabinet proposed a plan to debt-fund tax cuts. The plan rattled financial markets, with the Pound Sterling reaching record lows and UK Gilt yields rising to post-financial crisis highs. Liz Truss only held office for 44 days before she resigned.
Japanese Yen
The Japanese Yen fell to a new low of 150.15 vs the USD as the central bank kept its ultra-loose monetary policy in play. Japan spent $42.4B (6.3T Yen) in October to support the Yen, and reports suggest that the BOJ could intervene again. If Japan does need to raise more money for currency intervention, they might have to sell their holdings of US Treasuries, which would send yields higher.
Chinese Markets
In October, we saw the Chinese Yuan fall to its lowest level since 2008 due to a faltering real estate market and increasing pressure from the US Federal Reserve. Despite support from China's state bank, policymakers continue to face strong headwinds in attempts to keep the economy afloat. The Chinese real estate market first began having issues in the summer of 2021 when China Evergrande first hit the headlines. However, this does not seem to be an isolated incident. Additionally, the Covid-Zero policy out of China has continuing effects globally by causing problems with supply chains but also limiting oil demand because of lockdowns.
The Months Ahead
The last of the Q3 earnings season and a bunch of crucial economic data, including the Fed's rate hike choice on 11/2, will occur in November. We'll also be paying attention to CPI data and the employment report. Additionally, Energy dragging down recent CPI reports might not reoccur in future releases. However, the Fed will probably be observing the services aspect and housing costs.
S&P 500 Q3 earnings growth is 2.2%, which is less than the original estimated 2.8%. If we exclude energy sector results, then overall earnings have declined by 5.1%. Despite this disappointing news, some analysts say that these latest figures are actually "less bad than feared." Consequently, stock prices rose in October due to this positive sentiment and positioning among investors.