ARTICLES

Both the Fed and the RBA continued to ramp up monetary tightening in July in an effort to curb high inflation rates. Moderating signs of economic growth, however, caused markets to unwind some of the tightening expectations currently priced in. Despite this volatility, equity and credit markets ended the month stronger while yields fell. This improved risk sentiment boosted Australian bond markets, with the Bloomberg AusBond Composite 0+ Yr Index gaining over 3.3% for the month.

The RBA delivered another 50bps increase of the cash rate to 1.35%, but contrary to recent cash-rate increases, yields fell after the decision with mixed economic data during the month. In July, the 3Y yield closed the month at 2.65% (-45bps), and the 10Y yield closed at 3.05% (-60bps). 

The labour market continued to be resilient, with 88,400 new jobs added, which pushed the unemployment rate down to 3.5%. Forward-looking labour demand indicators such as job vacancies, job ads and business surveys of employment intentions indicate ongoing near-term strength and upward pressure on wages.

Price increases across the board pushed headline inflation up by 1.8%, corresponding to a 6.1% annualised rate. As measured by the trimmed mean, core inflation rose 1.5% or 4.9% for the year. New dwellings (+5.6%) and automotive fuel (+4.2%) were the leading sectors pushing prices higher. 

The money market yields continued to push higher as markets began to price in cash rate expectations for the year ahead. Currently, the futures market is predicting a 3.0% cash rate by year-end 2022 but has tempered expectations for the mid-2023 cash rate, which is now 3.17% (down from 3.75%).

July saw a fair bit of volatility in credit markets but managed to close the month on a firm footing. This is partly due to investors reacting to the second consecutive negative GDP print in the US late in the month and the unwinding of generally bearish bond market positioning at the start of the month. 

July 2022 Summary

• Equity markets surged higher despite inflation continuing to climb
• The US Fed delivered a 75bps hike but signalled a focus on data moving forward
• US GDP data came in negative for the second consecutive quarter delivering a technical recession
• US 10Y yields fell by the most in a month since March 2020
• Corporate earnings in the S&P500 cooled off back to last 2020 levels

US Economy

US equity markets all but ignored the second consecutive negative GDP reading in the US, higher than expected inflation data, and an outsized 75bps hike from the US Fed, all while the corporate earnings season began. The tech-heavy Nasdaq 100 performed the best since March 2020, and the S&P 500 wasn't far behind, having its best month since November 2020. Growth equities outperformed Value by a healthy margin, while longer duration assets held up firmly. 

Australian Equities

In Australia, the ASX 200 lifted 5.7% for July, closing at 6,945.2 points with all sectors in the green, barring Materials, which was flat. Information Technology (+15.1%) and Real Estate (+12.2%) sectors were up double digits, while financials (+9.2%), consumer discretionary (+8.2%), and health care (+7.6%) sectors were not far behind. IT is still the worst performing sector in the ASX 200 this year, despite the strong month in July.

Overall, the sectors performed well in the third quarter of this year, with Consumer Discretionary stocks leading the way. Technology stocks also showed strong returns, while Energy, Industrials, REITS and Financials all had gains of more than 7%. Basic Materials and Utilities were in the middle of the pack, with returns of 6.1% and 5.5%, respectively, while Communications, Healthcare, and Staples stocks lagged behind with returns below 4%.

The Federal Reserve

The Fed's commitment to bringing inflation down to its target rate has been contradicted by the market, which is now expecting less aggressive rate hikes. Inflation data continues to surprise the topside, with the latest figures showing an annualised rate of 9.1% compared to market estimates of 8.8%. Other inflation data points are beginning to show prices starting to fall, which brings life to the peak inflation narrative. 

The economy contracted in the second quarter, with two consecutive negative GDP prints signalling a potential recession. Additionally, services PMI slid into contraction, while manufacturing PMI dropped to its lowest level in two years. Initial jobless claims also increased while consumer credit continued to climb. Overall, the data in the US paints a picture of an economy that is beginning to struggle.

Peak Inflation Narrative

Since the blockbuster US CPI print in May, central banks' reaction functions shifted, leaving the narrative of a temporary inflation spike that would resolve itself post-COVID-19 lockdowns in shambles. Central Banks are now acknowledging that price pressures are coming from the demand side as well, turbocharged by geopolitical tensions, re-opening and massive fiscal policy around the world. Since monetary policy cannot fix problems related to lockdowns, weather, or geopolitics, it attempts to manage the economy by making changes that influence demand.

Reserve Bank of Australia

RBA has started to tighten monetary policy, with the Governor indicating that further accommodative measures are not necessary at present. The exact extent and the economic implications of this shift are yet to be determined. In early July, Markets predicted a cash rate of 3.6% by December, followed by an increase to 4.2% in mid-2023 and then averaging around that level for the next ten years. However, this seems unrealistic as it would require one of the biggest and swiftest tightening cycles during the current inflation-targeting era ending with a neutral cash rate at 4.2%. The RBA's estimate of the natural cash rate is 2.5%. A cash rate of 4.2% would be enough to cause such a significant slowdown that it would trigger the next easing cycle. 

Even with the recent drop in interest rate futures, the markets expect a 3.1% rate by December 2021 and a 3.75% rate by mid-2023, according to analysts and will potentially cool off further in the months ahead. 

Looking Ahead

The remainder of the Q2 earnings season and vital economic data, like the CPI print, will be seen in August. It's important to remember that the Federal Reserve won't meet again until late September, so rate hikes won't be seen before then. According to the last 50 years' worth of data, August has seen negative equity market returns with an average of -0.13% for the month with 27 out of those 50 years having ended with positive returns while 23 were red. The only month worse performing month than August during this time was September which had an average return of -0.91%.

2022 has so far been a tough one for investors, with the major US equity indices down between 20-30% from their recent highs. The S&P 500 has registered its worst-performing first half since 1970. The tech-heavy Nasdaq 100 fell in 5 out of 6 months this year which was the worst first-half performance in 20 years (-30%), coupled with the worst quarterly performance in Q2 since the GFC in 2008.

The risk-off sentiment and low optimism continued to be driven by soaring prices, increasingly hawkish global central banks, the Russia/Ukraine war, China lockdowns, food and energy shortages, and growing recession worries.

Inflation in the US came in higher than expected, prompting the Federal Reserve to respond with a broad tightening and preparedness to push the economy into recession if needed. The Reserve Bank of Australia followed suit, and against this backdrop, yields climbed across the curve. Risk appetite fell on worsening recession prospects as equities and credit markets became more volatile. The Bloomberg AusBond Composite Index (0+ Yr), which measures the Australian bond market, was in a bear market during the month, dropping -1.48% and -10.51% over the last 12 months.

The Reserve Bank of Australia raised the cash rate by more than expected 0.5% in early June, putting an end to earlier indications that the typical 0.25% adjustments were on the way. Yields increased ahead of the RBA's meeting, but it was mid-month after US inflation statistics and the Fed's 0.75% increase when yields popped higher. Aussie 3Y and 10Y government bond yields climbed up to 3.70% and 4.21% before closing the month at 3.11% and 3.65%. The AU 30Y yield closed the month at 3.85%.

The higher cash rate adjustment from the RBA was justified because current high monetary accommodation levels were inconsistent with the RBA's observation of economic strength and resilience. Real GDP in Australia increased by +0.8% during the March quarter, compared to an above-trend growth of +3.3% for the year.

June 2022 Summary

• Many US equity benchmarks had their worst first half since 1970 
• The RBA raised rates by 50bps surprising many investors
• The US 10Y yield traded up to 3.5% (up 200 bps in H1)
• Inflation data hit 40-year highs while market measures are declining
• Futures markets are pricing a 3% Fed Funds Rate by the end of 2022 and a dovish swing in 2023
• Consumer sentiment has fallen to record lows in the US

Central Banks

Over the previous three Federal Open Market Committee meetings, the Fed has raised the federal funds rate by 25bps (March), 50bps (May), and 75bps (June). Since 1994, June has been the first month when the rate was increased by 75 bps. Markets priced a 50bps hike until 3 sessions prior to the FOMC meeting when the May CPI print and June consumer sentiment data came in much worse than expected.

The Swiss National Bank shocked global markets in the same week when it hiked its benchmark interest rate by 50bps, its first increase in 15 years. Brazil's central bank increased lending rates by 50bps, and the Bank of England raised its benchmark interest rate by 25bps while lowering its growth projection for Q2 to -0.3%. The Federal Reserve, the European Central Bank (ECB), and other central banks seem to be lagging behind the curve, contributing to the most surprising period of inflation in more than 40 years. They are now compelled to catch up with quick tightening, which could hurt global economies and capital markets, lowering the prospect of a soft landing and raising the risk of an outright recession.

Inflation 

Inflation figures are still high, with the most recent core CPI (May) excluding food and energy coming in at 6% year over year, down slightly from March's peak of 6.5%. Headline inflation in May recorded a new 40-year high of 8.6% year over year. May PPI (core) was 8.3% (YoY), down from its previous peak of 9.6% in March, while headline PPI reached 10.8%, down from its recent peak of 11.5% in March. 

Market measures of inflation tell a different tale, with 5Y breakevens declining by 120bps from their peak of 3.76% in March to a low of 2.56% in June, and 10Y breakevens retreating by 78bps from 3.08% in March to a low of 2.29% in June.

Despite a growing number of market indicators suggesting that peak inflation may be behind us, which is one argument in favour of bonds and decreased rates, the Fed's QT program and the rising supply of Treasuries coming down the pipe are fuelling discussion about future rate hikes.

US Equity Sectors

10 of the total 11 US equity sectors have fallen year to date. Despite a loss of nearly -17% in June, energy is the lone sector that is in the green (+32% YTD). Consumer Discretionary is one notable laggard, falling by a massive -26% in Q2. The Materials sector was the standout in June, falling almost 14% and suggesting that peak inflation has passed.

Commodities

The Bloomberg Commodity Index (BCOM) rose 19% in the first half of this year, following a 27% increase in 2021. However, it fell nearly 17% from its highs in March and June was its third-worst monthly fall since 2008. WTI Crude dropped 8% in June, after six consecutive monthly gains. WTI closed the first half of this year with a gain of 41%, following a 55% increase in 2021. Following the price of WTI crude oil reaching a record high of $130.50 in March, it has remained in a sideways range since then as it consolidates the previous sharp uptrend. The US Strategic Petroleum Reserve (SPR) is now at its lowest level since 1986.  

Foreign Exchange

A hawkish Federal Reserve, as well as a decline in risk appetite, helped push the US Dollar Index (DXY) up +10% in the first half. The Euro dropped -8% versus the dollar while the Japanese Yen fell by 18% due to a large divergence in monetary policy compared to the rest of the world. The Bank of Japan is an oddity amongst the central banks at the moment implementing yield curve control (YCC), keeping its 10Y government bond yield 25bps and dramatically weakening the Japanese Yen. 

Corporate Earnings

A lot is riding on the Q2 earnings season, which is right around the corner. The stock market will be significantly impacted by reported earnings and management predictions. According to FactSet, 103 S&P 500 firms have given guidance for Q2, with 70% of them being negative. A 10.2% increase in corporate income is anticipated to be the sixth consecutive quarter of growth over 10%. Third and fourth-quarter earnings growth rates are both expected to be over 10%. It will be interesting to see whether firms can continue to enjoy the record operating margins seen in recent quarters.

The Months Ahead

There is a high degree of uncertainty for the second half of 2022 in terms of economic development, earnings growth, inflation, rate increases, quantitative tightening, the Russian conflict, and food and energy supplies. While market indicators have been plummeting at an alarming rate since early June, economic inflation measures have remained steady at 40-year highs. The labour market and unemployment rates are still good, but consumer optimism hit a new low in June. The quick selling began with high-multiple expansion stocks and has now moved into the Value, defensive, and commodity groups. It's impossible to tell how sensitive the economy is to rapidly increasing rates at this time. The overnight Fed Funds Rate sits at 1.50% – 1.75%. The overnight FFR is presently around 1.50% to 1.75%. The futures market is currently pricing an FFR range of 3% to 3.25% by the end of 2022, but it also includes a 50bps cut in 2023, implying a growing risk of recession and a dovish Fed pivot. Commodities and rates are continuing to consolidate in July, with the US 10Y yield trading around 2.79%. The next two weeks will see the start of earnings season for the major banks, and investors will pay close attention to management's feedback and expectations.

Markets closed the month of May relatively unchanged, even though all of the major indices pushed to fresh 52-week lows during the month. The April volatility spilled into May before a late-month rally back to finish almost flat. The Nasdaq, S&P 500, and Dow bottomed on May 20. The benchmark S&P 500 hit bear market territory in May after a fall of close to -9% in April and a decline of close to -22% since the highs reached in January. From the lows seen on May 20, the market has bounced almost +9%, with many wondering if it's a dead-cat bounce or a resumption of the up-trend. 

The Federal Reserve's monetary tightening remains at the forefront, with the main question being how high will they go to get on top of inflation. The FOMC hiked rates by 50bps at the May 4 meeting, signalling another hike in June (50bps), including the runoff of its balance sheet ($8.9 trillion). The Fed highlighted that keeping inflation under control will be extremely challenging, but they hope for a soft landing instead of an outright recession. 

The RBA has decided to join other central banks in returning to neutral policy settings more quickly in order to control inflationary pressures and keep inflation expectations stable in the long term. Australian yields lifted following the Reserve Bank of Australia's decision to lift the cash rate by 25bps to 0.35% early in May. The AU3Y government bond yield hit 3.1% following the RBA's decision to close the month at 2.8%. We saw some steepening in the long end of the curve, with the AU10Y yield trading 23bps higher at 3.3% and the AU30Y yield 22bps higher at 3.6%.

Although Australia's cost of living pressures keep consumer sentiment under wraps, the April NAB Business Survey remained strong, showing high business conditions, driving labour market demand. Wage prices grew by 0.7% for the March quarter, and the unemployment rate fell to historic lows at 3.9%. 

May 2022 Summary:

• US Inflation remains very high, with annualised CPI at 8.3%
• RBA raised interest rates by 25bps in May to 0.35%<
• AU yields peaked in May and have consolidated lower since
• US stock markets finished in May close to flat, after a bumpy start 
• US gasoline prices set a record high at the bowser $4.67 a gallon/li>
• The US economy shrunk by -1.5% in Q1

Australian Interest Rates

The RBA has changed its outlook and policies so that it can return to a more neutral interest rate setting as quickly as possible. This is happening because there are pressures on inflation that need to be dealt with, and it's important to keep inflation expectations stable in the long term. The 25bps move from the RBA in May signals a return of consecutive 25bps interest rate increases in the months ahead. A larger move would also be possible if the Q2 inflation data comes in hotter than expected. Market expectations are anticipating a cash rate of 1.5% by year-end, with further tightening seen in 2023 up to around 2.5%, which is considered the neutral interest rate by the RBA at this time. 

US Economy

The headline CPI in April was the same as it was in March, at 0.3%. However, we saw a big increase in food prices +0.9% increase from March to April and also an increase in shelter prices by +0.5%, but energy prices decreased. Many are hoping inflation is peaking, although the numbers are painting a different story, stoking fears that inflation may not be short-lived. The US Department of Labor's Employment Report for April showed that more jobs were created than expected (428,000 jobs added vs. 380,000 expected). The unemployment rate (3.6%) held steady, and hourly wages increased but not as much as expected (0.3%). 

Oil Prices

The price of WTI crude oil increased in May by 9.5%, reaching $115 a barrel, +15% from the lows in May at around $100 per barrel. The last time we saw prices this high was back in 2008. The average price of regular gasoline in the US is $4.62 per gallon, which is higher than it has ever been before, according to AAA data. 

US Dollar

Persistent inflation levels and a rising interest rate environment are contributing to the strength of the Greenback. The currency reached a high of nearly $105 in the US Dollar Index (DXY) before paring gains and ending the month down -1.1%. The DXY is up 6.4% so far in 2022.

The Months Ahead

The next FOMC interest rate decision will be announced on June 15, which is likely to see a 50bps rate increase. There is a triple witching options expiration on June 17, which is the expiry of stock options, stock index futures options, and stock index options contracts all simultaneously on the same trading day. This can cause volatile price movements in the underlying assets due to the three options classes, which share the same underlying asset, expiring at the same time. June 24 will see the annual Russell Reconstitution, historically one of the highest trading volume days of the year. Corporate earnings estimates will remain in focus, with any revisions lower may cause further selling pressure.

The first quarter of 2022 has drawn to a close, and US stock markets have delivered the first quarterly loss in over two years due to a range of factors like the ongoing geopolitical situation in Ukraine, surging global inflation and a hawkish change from the US Federal Reserve. Inflation had already reached 40-year highs in Q4 last year, with a +6.8% CPI reading in November 2021 and a +7.9% CPI reading in February 2022. The US Fed's George (FOMC voter and hawk) recently stated that it's appropriate to raise rates to the neutral level expeditiously. Balance sheet size needs to decline significantly if inflation is still high at the neutral funds rate; more hikes will be needed. Puts neutral rate at around 2.5% 'as a starting point'.

The ASX 200 has ended Q1 2022 with a +2.61% gain and was a relative outperformer of the US and global equity counterparts due mainly to the surging prices seen in the commodity space, buoyant Financial and Technology sectors. In Q1, Iron Ore has gained +40%, Nickel +55% and Natural Gas +61%, all pushing local producers skyward. For the month of March, the ASX 200 gained +6.35% on a total return basis to end just shy of the 7500 level, outperforming the S&P 500 by +2.77% on the month.  

Commodity prices and interest rates have risen in unison over the past months, while the world's economies are adjusting to the supply chain issues and changes in consumer spending impacted by COVID. The Russian invasion of Ukraine was the fuel to the fire, pushing commodity prices even higher as harsh sanctions were imposed. Interestingly enough, the major US equity indices bounced a day after the initial invasion of Ukraine and have been trading higher since.  

• US equity markets experience the first negative quarter in two years
• Commodity prices continue to soar, with agriculture, metals and energy rising rapidly
• Inverted yield curves seen in the US 2y/10y and 5y/30y spreads due to a fast rise in short-term rates
• Fed Funds Futures are now pricing 8-9 25bp increases in the federal funds rate by the end of 2022
• President Biden announced a release of 1 million barrels of crude oil per day from the Strategic Petroleum Reserve for six months    

Australian Interest Rates

The RBA has so far taken a patient stance regarding any changes in the cash rate, but that didn't stop the AU 3Y yield from rising as high as 2.47% as inflation continues higher and the market begins pricing more aggressive action from the RBA down the track. Yields pulled back to close the month, in line with the US. However, in March, the AU 3Y yield still gained 80bps to close at 2.34%. Rising yields were also seen in the longer duration Australian Government Bonds, with the 10Y (+71bps) and 30Y (+63bps) yields trading higher, closing March at 2.84% and 3.24%, respectively. 

US Interest Rates

In the opening days of 2022, futures markets were pricing in only three 25bps hikes for the entire year. Markets are now pricing in 8-9 interest rate increases of 25 bps, implying a 2.4% interest rate at the end of 2022. We saw the first 25bp increase at the March 16 FOMC meeting, with a unanimous agreement amongst all voting members, besides Fed President Bullard, who wanted to raise rates by 50bps. The statement released after the meeting was more hawkish than the market had anticipated, including the committee member's interest rate projections. As a result, the US 2Y and 3Y yields have risen the most so far this year, and we see inversions in the longer end of the yield curve. The 30Y yield is below the 20Y yield. The 10Y yield is below the 3Y, 5Y and 7Y. 

Inverted Yield Curve

In the last week of the month, both the US 2Y/10Y and 5Y/30Y spreads inverted, and while curve inversion can be associated with an eventual economic recession, it's not of immediate concern as there can be a lag from between 1-2 years before we see a top in asset prices and the onset of a recession. Notably, the 3 month/10 year spread usually trades in a similar direction to the 2Y/10Y; however, it has currently blown out to 233bps, which could be a reflection of how far behind the curve the Federal Reserve is, rather than an economic signal. 

US Equity Markets

Energy was the only sector out of the eleven to finish in the green for Q1, posting its best gains since 1989 (+38%) on the back of surging oil and gas prices. Communications stocks fell the most in Q1 (-12%), closely followed by Discretionary (-9%) and Technology (-8%) which had the largest drawdown in the period of (-21%). In the month of March, the Utility sector bounced (+10%) and broke out from a previous pre-pandemic high in February 2020. 

Rates and Stocks

The large-cap Russell 1000 Value Index outperformed the Russell 1000 Growth index in the first quarter by more than +8%, while the respective Small-cap Value Index outshone the Small-cap Growth Index by over +10%. In the large-cap sector, this is the Value component's most significant outperformance since 2002. The Nasdaq 100 (-20%) and Composite (-19%) fell the most from the 1-year highs posting the largest drawdown of all indices. The S&P500 and Dow Industrials posted relative outperformance compared to the tech-heavy Nasdaq. 

Growth Sector Bounce

After posting the largest drawdown of Q1, the Growth and Small-cap indices had a sizable bounce from their 2022 lows, although it may be temporary, and the real test lies in the weeks and months ahead. In March's closing days, IWM, an ETF tracking the Russell 2000 Index, ran into a critical technical resistance area that previously acted as support in the last 18 months around the $210 level, which is one to keep an eye on. 

Commodities

After posting a gain of +27% in 2021, which was the largest annual performance since 1979, the Bloomberg Commodity Index surged a further +25% in Q1 2022. At the highs seen in early March, the index was up +42% YTD, its most significant quarterly advance since 1973. Brent Crude was up +79% at the high point in March before closing at +39%. This pullback in prices was partly due to the optimism around peace talks between Russia and Ukraine and President Biden announcing the largest Strategic Petroleum Reserve release ever. Other notable commodity market gains for Q1 include Palladium +18%, Soybeans +20%, Cotton +23%, Aluminium +24%, Corn +26%, Wheat +30%, Iron Ore +40%, Nickel +55% and Natural Gas +61%. 

Looking Ahead

The March NFP jobs data highlighted that the labour market is increasingly tight, putting upward pressure on wages and prices in the economy. With the unemployment rate dipping further to 3.6%, compared to the prior month's 3.8% and wage growth lifted further from 5.6% up from 5.2% in February. The labour force participation rate is picking up; it's certainly not keeping up with the rising demand for workers. Economic data shows that the economy is robust, although increasing inflation is likely to slow things down in the months ahead and impact corporate earnings further. Although there seems to be little progress in talks between Russia and Ukraine, credit spreads are trading back around pre-crisis levels, which should be supportive of equity prices in the short term.

The month of February 2022 was an incredibly wild ride in markets, with 2-3% daily swings in major equity indices a regular occurrence. The month of February started positively, following on from the late January rally in equity markets. Investors remained sceptical of a supposed 50bps interest rate hike from the US Fed in March, which saw yields back off the highs and risk appetite pick up slightly. The rally quickly faded after the January inflation data came in at the highest rate since 1982 and called for a more aggressive path for interest rate hikes returned. 

No sooner than the market was coming to terms with a March interest rate hike in the US, the focus quickly shifted to the geopolitical headlines regarding Russia and Ukraine, which has since turned into the precursor for the Russian invasion. Risk assets dived on this news, and safe-haven flows were in demand. Fighting intensified in the closing days of the month, as did the sanctions imposed by Western countries, which now include removing some Russian banks from the SWIFT payment network and freezing Russian assets around the globe.  

The ASX 200 finished the month of February in the green, finishing up +2.11% with most other global equity markets in the red. This was after the index's worst monthly performance in January since 2008. The RBA did not change the current monetary policy settings at the March meeting, noting that the economy had a positive feeling, even as the risks increased from the previous meeting. The RBA noted the upside risks to inflation coming across as more hawkish in their overall assessment. The January unemployment rate in Australia held steady at 4.2%, while the participation rate (66.2%) and the number of people employed grew slightly. 

February 2022 Summary:

• Geopolitical tensions are pushing commodities sharply higher
• Inflationary pressures are increasing with new data beating market estimates
• Interest rate futures are forecasting a 25bps rate hike in March from the US Fed
• The US 2Y/10Y spread has flattened further to 21bps
• 76% of S&P 500 companies reported positive earnings surprises for 4Q21
• Over 70% of S&P 500 companies reported positive earnings surprises for the last quarter in 2021

US Corporate Earnings:

Earnings growth is expected to slow in 2022 from the blistering pace seen in 2021 (+47.8% annual growth). Revenue figures are falling short of earnings, with close to 70% of companies reporting upside sales figures surprises, beating estimates by around 5%. Tech companies lead the way in terms of earnings beats, with close to 88% of tech companies beating market estimates, closely followed by real estate companies at 82%, Medical/Healthcare at 81% and Financials at 80%. On the earnings growth front, Materials and Industrials sector companies lead the charge reporting strong 56% and 104% growth, respectively. 

Regarding price action following the earnings data release, Consumer Staples names saw the largest positive 2-day move, trading up by around +2.2%, followed by Real Estate at +1.2%. On the downside, Communications stocks slid around -2.4% after the data release and Financials gave back around -1.7% on average. 

US Equity Sectors:

Small and micro-cap stocks were the best performers during the month of February on a total return basis, with large-cap stocks feeling the worst of it. Unsurprisingly, Energy stocks were the best performing, posting a +7.2% for the month. The Communication sector was the biggest loser, down -7.1%, with REITS, Tech and Consumer Discretionary all lower by around -4.0 to -5.0% in what was a month to forget. 

Interest Rates:

The US 2Y/10Y spread continued to narrow further during February, trading below 38 basis points, due mainly to the upward trajectory in the 2Y yield. A negative 2Y/10Y spread is said to be the precursor to a recession, albeit a lagging indicator, but one to watch in the months to come. The interest rate futures market is pricing in a 25 basis point increase in rates for March, plus another five rate hikes in 2022. In early February, the market was pricing up to seven rate increases, so expectations have fallen in recent weeks. 

Commodities:

Commodity prices measured by the Bloomberg Commodity Index traded to record highs in February, up over +6% in the month. Brent Crude gained +10.3%, and WTI Crude prices closed behind +8.6% on the back of constrained supply and harsh sanctions on Russia for the Ukraine invasion. Aluminium was up close to +12%, and Gold lifted around +6.8%. The Wheat market has seen enormous gains since the geopolitical situation has intensified +19% on the month, due to Russia and Ukraine accounting for almost 25% of the world's wheat exports.  

Cryptocurrencies:

Major cryptocurrencies seemed to find a base in February after experiencing selling pressures since late last year, with Bitcoin trading around $38,000-$44,000 and Ethereum between $2,600-$3,200. Digital currencies are expected to see upward pressure as sanctions, and payment networks attempt to constrict the movement of fiat currencies. In recent weeks, the Russian Ruble has devalued by almost 50% as many major Russian banks have been removed from the SWIFT payment network, and sanctions have taken effect. Many Russian citizens have looked to cryptocurrency to avoid further Ruble depreciation. 

The Months Ahead:

Key risk events in the months ahead at the time of writing are the Russian/Ukraine conflict and, to a lesser extent, the upcoming FOMC meeting where the US interest rate settings are expected to change on March 16th. Some have speculated that an escalation in the geopolitical sphere would cause the US Fed to hold on to their rate hike plans, but this would be a surprise to markets at this time. COVID restrictions are starting to be reduced in some countries, with many opening their borders to international travellers without isolation requirements which should be broadly positive for economic growth. However, inflation around the globe continues to push higher, which has the opposite effect.

Equity markets surrendered in January to the pressures of soaring inflation, a monetary policy shift for the Fed, the Omicron variant, geopolitical tensions with Russia and Ukraine and the persisting supply chain issues drove the risk-off sentiment. The ASX 200 fell by -6.5%, the S&P 500 -by 5.26%, Dow Jones Industrial Average -by 3.32%. The high-beta indices saw the worst of it, with the Nasdaq 100 -8.93% and the Russell 2000 -9.66%.

Equity markets surrendered in January to the pressures of soaring inflation, a monetary policy shift for the Fed, the Omicron variant, geopolitical tensions with Russia and Ukraine and the persisting supply chain issues drove the risk-off sentiment. The ASX 200 fell by -6.5%, the S&P 500 -by 5.26%, Dow Jones Industrial Average -by 3.32%. The high-beta indices saw the worst of it, with the Nasdaq 100 -8.93% and the Russell 2000 -9.66%.

The unemployment rate in Australia dropped to 4.2%, with 64,800 new jobs added in December, beating market expectations. Following the global trend, the quarterly inflation figures in Australia also came in slightly hotter than expected at 1.3% (1.0% Trimmed Mean CPI), bringing the annualised rate to 3.5% for the calendar year and above the RBA medium-term target range of 2-3%. This may bring about speculation that the RBA will have to move sooner than the 2024 lift-off date previously mentioned.

The change in monetary policy stance from the US Federal Reserve was the most notable event in the month. The major US equity markets dropped following the release of the December FOMC meeting minutes on Jan 5. The hawkish shift was attributed to a robust economy, a tightening labour market and persistently high inflation. Futures markets are now pricing in a March increase in the federal funds rate and faster subsequent increases than previously expected. The Nasdaq 100 and the Russell 200 both declined by more than -3% following the release of the FOMC minutes. 

This price action really set the tone for January and largely confirmed expectations for a March lift-off at the next FOMC meeting. Fed Funds interest rate futures are now pricing a 100% probability for a March increase (89% probability for a 25-50 basis point increase and 12% for a 50-75 basis point increase). Market economists are now forecasting five rate increases for 2022, with some saying up to seven. 

January 2022 Summary

• Australian inflation is above the RBA's target range at 3.5%
• US inflation is at 7%, which is the highest rate of increase since 1982
• The US Fed is expected to raise interest rates at the March FOMC meeting
• Global equity markets declined in January, hitting 'technical correction' territory
• The Volatility Index measure by the VIX hits a 1-year high
• Crude oil continues to push higher with rising demand and geopolitical tensions
• The US annual GDP figures came in at 6.9% in December

US Equity Markets

Major US equity indices sold off heavily in January, with many moving into correction territory (when prices decline more than 10% from the recent highs). Most markets suffered their largest sell-offs since the pandemic began in March 2020. The Value sector outperformed Growth, although both were negative overall on the month. Large tech names were amongst the worst performers in January, alongside small-caps which both broke through long term support (200-day moving averages). 

US Treasury Markets

Yields spiked higher in January, with the benchmark US 10Y yield pushing to a high point of 1.87%, after trading around 1.52% to start the month. The US 2Y yield jumped from 0.74% to 1.24%, and the 10s/2s yield spread flattened to new 1-year lows following the FOMC statement. The 10s/2s yield spread is the difference between the 10Y yield and the 2Y yield, with a negative spread said to be the precursor to a recessionary period. 

US Corporate Earnings

Q4 US Corporate Earnings have been solid so far, but the post-pandemic momentum could be starting to fade. FactSet data shows that 35% of S&P 500 companies have now reported Q4 earnings, with over 78% beating consensus EPS expectations below the 1-year average (84%) but still above the 5-year average (75%). 

Market Volatility

Unsurprisingly, market volatility kicked up a gear in January, as commentary from US Fed officials around tapering, interest rates, and inflation sent markets into a nosedive. The volatility index (VIX) pushed to a new 1-year high in the last week of the month, close to 39.0. The index consolidated in the month's final days but still closed January up 45%. 

Crude Oil Prices

Crude oil prices pushed to 7-year highs in January, rounding out a 20% increase for the month. Crude oil futures traded above $88 per barrel, which we haven't seen since mid-2014 on the back of Russia/Ukraine tensions, rising inflation and demand. Some market analysts expect prices to climb back above $100 per barrel later this year.  

The US Dollar

The US Dollar has been on the front foot in the last few months, with a rising interest rate environment in the US contributing to its strength. The US Dollar Index (DXY) reached a high of $97.45 late in January before giving back some gains to close out the month +1.01%.

Cryptocurrency

Digital currencies were on the nose in January, with Bitcoin losing over 17% for the month and over 50% in the last three months. It has been a wild ride in the cryptocurrency space, with Bitcoin (BTC) experiencing 14 separate 'technical bear markets' since its beginnings in 2009 (a fall of over 20% from the recent highs). The Biden administration is expected to release new regulations in February as a matter of national security, weighing on the digital asset space. 

The Months Ahead

There are many factors to watch in the first weeks of February that will impact markets. Over 20% of S&P 500 companies will report earnings this week, and there is a heavy economic data calendar. Continued Fed watching will be in focus around the trajectory for interest rates for the remainder of the year.

Global equity markets surged in 2021 on the back of unprecedented monetary and fiscal stimulus, strong economic activity and burgeoning corporate earnings. Not even the headwinds of soaring inflation, new COVID variants and a recent hawkish tilt by the US Federal Reserve and other central banks around the globe could dampen the exuberance in the final days of December 2021.

Australian employment data provided continued to improve throughout 2021. The unemployment rate came in at 4.6% in November, with 366,100 new jobs added, well above market expectations. The employment report was a real bright spot, with 128,300 full-time jobs and the participation rate lifted back toward pre-COVID levels at 66.1%. Australia has been one of the best-performing nations regarding economic recovery but hit a speed bump in the third quarter of 2021 with renewed lockdowns caused by the Delta variant.

In 2021 on a total-return basis, the S&P 500 was the standout gaining +28.8%, the tech-heavy Nasdaq 100 +27.6%, Nasdaq Comp +22.3%, the Dow Jones Industrial +21.0%, and the small-cap Russell 2000 index lifted +15.2%. The ASX 200 posted a +15.92% gain (all quoted in local currency terms). Since the global financial crisis lows in 2009, 2021 was the second time in the last 13 years where the S&P 500 has outperformed the Nasdaq 100. Given the Nasdaq 100 outperformed the S&P 500 in 2020 by +31%, it held up relatively well. 

The Russell 2000 only gained modestly in 2021, but the small-cap index owns the best returns since the COVID pandemic lows. From the low point in equity markets in March 2020, the Russell 2000 Index has gained over +156%. For comparison, the Nasdaq 100 gained +149%, S&P 500 +120%, Dow Jones Industrial Average +104% in the same timeframe. 

December 2021 Summary

• Global equity markets gained in 2021 on the back of unprecedented monetary and fiscal stimulus
• US equity indices enjoyed solid gains for the third straight year 
• All of the 11 sectors in US equity markets posted double-digit returns for the first since records began in 2001
• Growth outperformed Value for the fifth consecutive year
• Inflation is rising at the fastest pace in 40 years
• The Bloomberg Commodity Index gained over +27% for the year
• The US Fed commenced tapering of their QE program, and three interest rate hikes are expected in 2022

Equity Market Sectors

According to Bloomberg data dating back to 2001, it's the first time all eleven of the equity market sectors have achieved double-digit annual returns. The top-performing sectors being Energy +54.5%, REITs +45.9%, Financials +35.0%, and Technology +34.4%. Surging oil prices benefited the energy sector with strong demand for petroleum around the globe. High yielding real estate investment trusts (REITs) reaped the rewards of ultra-low interest rates and strong demand for rental properties and warehouse space. 

M&A Activity

Large-cap financial institutions with exposure to capital markets gained in 2021 from the record merger and acquisition (M&A) and initial public offering (IPO) activity. Global M&A deals surpassed $5 trillion for the first time ever, beating the previous high of $4.4 trillion in 2007. Deal volumes in the US almost doubled on the previous year to $2.6 trillion, and private equity deals set a record at nearly $1 trillion. We saw a record 1032 IPOs in the US, a 5x increase on the yearly average of the previous decade. 

Inflationary Pressures

Inflation came back with a vengeance last year, with the COVID pandemic and preceding policy responses having a profound impact on demand, supply and labour around the globe. The manufacturing shutdowns seen in 2020 damaged the global supply chains across multiple sectors whilst also shifting demand away from services and towards goods. We saw $6.6 trillion in fiscal spending in the US, as the Federal Reserve provided wide-ranging support to financial markets, including the zero interest rate policy (ZIRP) and quantitative easing (QE). The November reading of the consumer price index (CPI) showed a +6.8% gain in the previous 12 months, the fastest increase in 40 years. 

Commodities

WTI Crude Oil gained +55.3% in 2021, while gasoline prices lifted +58.1%. Coffee added +76.2%, Lumber +58.1%, Natural Gas +46.0%, Cotton +43%, Aluminium +41.1%, Copper 28.6% and Wheat +21.2%. Precious metals including Gold and Silver were the laggards in the sector, declining -4.3% and -11.9%, respectively. The Bloomberg Commodity Index (BCOM) gained over +27% for the year, which is the largest annual gain since 1979, adding to the global inflationary pressures. 

US Federal Reserve

At the November 3rd meeting, the US Federal Reserve shifted its stance towards more hawkish policy settings by announcing it will begin tapering the asset purchase program by $15 billion per month. By the December meeting, they reduced purchases further by $30 billion per month, which means the program will finish by March at the current rate of reduction. The term 'transitory inflation' was retired from the Fed's monthly statement, and interest rate futures began pricing up to three rate increases this year. 

Looking Ahead

Equity markets pushed to new highs in the final days of the year, which might suggest investors are not expecting ongoing shutdowns related to the Omicron COVID variant and lockdowns to begin easing soon. Corporate earnings have remained strong, showing it is possible to navigate the supply chain issues and inflationary pressures seen in recent months. Historically for equity markets, weak performance tends to self-perpetuate, and the same is true for strong performance. Just because we have seen three consecutive positive years does not imply we will soon see a trend reversal. The path of least resistance remains higher for equity markets at this point in time. 

The ASX200 posted its third consecutive monthly decline in November after a late sell-off led to a -0.5% decline on the month. Still, the ASX200 was a relative outperformer when compared to the -0.7% drop in the S&P500 and the larger losses seen in Europe (-2.3%) and emerging markets (-3.2%). In November, Australian Government bonds found a bid, with the yield falling by 38bps after rising by 59bps in October. The AU 10Y bond yield closed at 1.70% in November, off the highs seen in October of 2.07%. 

US Federal Reserve Chairman Powell's comments during the month caught the market by surprise, suggesting it was time to retire the word 'transitory' regarding the inflation outlook. Seeming more concerned about having to adjust monetary policy to keep the inflationary pressures in check and that he thought it was important to complete the tapering process faster than previously expected. 

Market participants had speculated that the rising Omicron COVID cases might encourage the Fed to slow down on their tapering plans, especially after highlighting this concern specifically during the month by saying that Omicron could pose downside risks to economic activity, employment and inflation. A hasty taper plan could mean that we see rate hikes sooner than previously forecast, which could be highly impactful to markets. Fed fund interest rate futures are pricing in a 28% chance of a rate hike by March 2022 and a 58% chance for May 2022.  

November 2021 Summary

• The local economy posted a -1.9% contraction in Q3 but was +3.9% higher than the same period one year prior
• Home prices in Australia are still rallying, up +1.1 % M/M across eight capital cities
• The US Fed's Powell stated, "it is probably a good time to retire the word transitory with regards to inflation." 
• The COVID Omicron variant has startled markets in recent weeks
• Crude oil lost over -20% in November due to Omicron fears
• The VIX Index surged the most since February 2020
• Holiday sales have so far been robust but slightly below market expectations

Equity Markets

The major equity markets indexes all made new highs early in the month of November but failed to hold onto the gains, with only the Nasdaq 100 / Composite ending the month in the green. For the first time in over ten years, the S&P500 closed the month in the red, breaking a typically strong month for equities. The Russell 2000 small-cap index saw some notable volatility, falling over -4.2% from the highs set in the first week in November. The sell-off in small-caps was so dramatic that some key support levels were breached, including the 50-day and 200-day moving averages.  

Earnings Season

US corporate earnings beat expectations handily in Q3 2021, coinciding with equity markets rallying to new highs in the first week of November. FactSet data shows that 83% beat market consensus EPS expectations. Companies are essentially reporting earnings that are 10% above the market expectations. FactSet highlighted that close to 350 of the 500 companies in the S&P500 noted the term "supply chain" on their conference calls, the highest in over ten years. 

Volatility Index

Volatility measured by the VIX Index saw its most significant monthly gain since February 2020 in November, with the index jumping +68% in the month, trading at a low of 14.72 on November 4th to a high point of 28.98 on the 26th, which was the day after the Thanksgiving holiday—primarily attributed to the Omicron COVID variant spooking market participants.

US Economic Data

The Department of Labor in the US released the Employment Situation Report on November 5th, showing +531,000 new jobs were created vs market expectations of 450,000, and the unemployment rate fell to +4.6%. Hourly wages grew modestly at +4.4%, while the labour force participation rate stayed the same at 61.6%. CPI in October came in red hot, up +0.9% M/M compared to a +0.6% expectation and showing a +6.2% Y/Y, which is the fastest increase in prices since 1990. 

Oil Markets

Crude oil prices lost ground to the tune of -20% in November after topping out at multi-year highs around $85/bbl but is still up +38% YTD. President Joe Biden, along with other OPEC member countries, announced the release of strategic reserves in an attempt to lower prices at the gas pump. The average price of a gallon of fuel in the US is $3.40 when 12 months ago, a gallon cost $2.13 (+60% Y/Y), according to AAA data. 

US Dollar

The US Fed seems more hawkish by the day, and rising inflation levels have given the US dollar a tailwind of late, accelerating the recent rally in the currency. The Greenback posted a 16-month high at $96.940 on November 24th before consolidating into month-end. The US Dollar Index (DXY) gained +1.86% for the month of November.

Bitcoin Volatility

Bitcoin lifted above $68,000 at the start of November, which is a new all-time high in the digital currency, before coming under the same selling pressures seen in other risk assets, seemingly on the back of the inflationary fears and Omicron COVID variant at the end of the month. Bitcoin closed the month down -6.9%.  

Looking Ahead

Hotter than expected inflation numbers, a more hawkish Fed and the new Omicron COVID variant were enough to drive markets lower in November. The market will now look to the following US Fed policy meeting on December 15th for clarification on the speed of tapering and what the interest rate expectations look like into 2022. Equity markets tend to wind down in the latter stages of December with a bias to the topside.

After a brief pause in September, equity markets surged to fresh highs in October as the S&P500 posted its best performance of the year so far. Equities caught a bid on the back of solid earnings and rising risk appetite as Congress drew closer to a solid spending package. Stocks rose in unison with oil prices, with WTI crude lifting over +10% in the month, fetching near a seven-year high around $86/bbl as consumption dwarfed supply draining oil reserves. The ASX 200 slightly declined for the second month running, dipping by 0.1% in October. The ASX200 lagged last month due to an uptick in inflation and tighter monetary policy in Australia compared to other developed economies.

Earnings season started positively, but economic data began to muddy the waters as consumer prices continued higher. If prices continue to rise further, the Federal Reserve may have to cut back on its support for the economy and start to raise interest rates, even though the US economy grew only 0.5% in Q3, which is the weakest growth figure since the pandemic began. The Federal Reserve has signalled that it does not plan on raising interest rates soon, but the market now expects to taper their bond-buying program in the months ahead. 

Bottlenecks in the global supply chain and the combination of rising energy prices have investors on their toes regarding the inflation outlook. The short end of the curve has begun to rise as expectations for interest rate hikes around the globe have been brought forward. Many Central Banks worldwide have become more hawkish in their views which have put upward pressure on yields. The Bank of Canada surprised the market by ending its bond-buying program abruptly and signalled rate hikes in the near future. The Bank of England is preparing to raise rates in November, and the Reserve Bank of Australia abandoned the 'yield curve control policy'. 

October 2021 Summary:

• The short end of the curve climbed as markets priced in rate hikes in 2022.
• Iron ore dipped to $108/Mt as fallout from the property sector weighed on the steel output, and production was cut back due to power outage.
• Stocks posted new all-time highs as Congress came closer to a spending deal and earnings season kicked off.
• The yield curve flattened in the US, leaving many asking if the economy could handle sustained higher rates.
• CPI figures continued higher while PPI data came in a touch softer, which means price pressures may ease in the months ahead.

All of the eleven equity market sectors finished higher, led by Energy and Consumer Discretionary stocks, both up over +10% for October. The Russell 1000 Growth index was the standout performer gaining +8.5%, and the Value sector gained +5.2%. Small and micro caps enjoyed gains of +4.3% and +2.3%, all quoted on a total return basis.  

Commodity Markets:

The largest gains in the commodity markets in October were seen in the oil markets, with WTI futures closing the month higher by +10.3% and Brent crude close behind with +8.1%. Agriculture markets have seen a modest bid recently, and Corn was the standout this month, gaining close to +6.0%. Natural Gas futures experienced some volatility after spiking higher to start the month, ending down -9.1%, and Gold ticked up slightly, gaining +1.5%. The Bloomberg Commodity Index (BCOM) also printed new highs to start Q4, finishing up +2.7% in October. 

Earnings Season: 

We've now passed the mid-point of the Q2 earnings season with over 50% of S&P500 companies have reported, and we have seen positive earnings surprise in over 80% of those companies, with an average beat of almost 10% vs market expectations. These numbers are above the five year average of 75% and 8.2%. Equally impressive are the earnings growth numbers, with just under 81% reporting positive growth with an average growth rate of 39%. 

Interest Rates:

US2Y Treasury yields spiked higher in October to close 0.56%, which is up significantly from the 0.27% close in September, causing the yield curve to flatten. The US10Y yields climbed but at a slower rate, closing the month at 1.56%, up from 1.48% the month prior. US30Y yields fell at the beginning of Q4, finishing the month at 1.93%, from 2.03% in September. There is currently 1% between the US2Y and US10Y yields, but an inversion of that spread is typically followed by a recession which is one metric to watch. 

Cryptocurrencies: 

Bitcoin rallied to new highs in October after trending mostly down in September, hitting a high point of around $66,000/coin, as the first Bitcoin ETF was launched. Ethereum also pushed to new highs in October, trading above $4,400 after an upgrade to its network was well-received. Interestingly, the price action in Ethereum since the start of winter shows similarities to Bitcoin's 2017 run higher during the same time period. 

The Months Ahead:

Equity markets are at record highs at the time of writing, and with November being a seasonally strong month, we may continue to see markets push higher. November is the best month for equity market returns on a 10Y timeframe. The upcoming holiday shopping season and corporate earnings should give markets a tailwind into the year's end. Still, it is worth watching the impact of the Fed tapering their bond-buying program, supply chain bottlenecks around the world and the rising consumer prices, which could cause markets to temper their risk appetite.

The 3rd quarter has now drawn to a close, and investors are sighting a number of cautionary factors to consider for the remainder of the year. After a strong performance in equity markets since the beginning of 2021, investor risk appetite is beginning to show signs of slowing, with the US Fed and many other Central Banks around the world tilting towards tapering their stimulus programs and bond yields around the globe beginning to rise.

In Australia, we saw the extension of lockdown measures in both NSW and Victoria, but that had little negative effect on equity markets, as the market began to price in a delay on the RBA's tapering plans, contrary to many other Central Banks. Improved vaccination rates and a clearer picture of the reopening plans has allowed investors to look through the lockdown related contraction to a solid outlook for the economy in 2022. For the third quarter, the ASX200 posted a +1.7% gain which beat both the US and European indices, which returned +0.6% but lagged Japan which gained a standout +5.3% (all in AUD terms). 

In recent weeks, natural gas prices in Asia and Europe have surged, prompting further concerns that inflationary pressures might last longer than Central Banks and market participants currently expect. As the Northern hemisphere heads towards winter, increasing energy costs are expected to impact global growth if the trend continues. The Bloomberg Commodity Index jumped +5% in September and is now up +29.2% year to date. Natural Gas surged +34% in September and +135% for the year. WTI lifted +14.2%. +56% for the year, for the highest monthly close since 2014. 

In US corporate news, constant chatter about supply chain constraints dominated the airwaves in September and seemed to be deteriorating rather than showing signs of improving. This news, alongside potential technical factors relating to month-end and quarter-end, triggered a three-day sell-off in US equity markets in the final days of September. The major bourses fell around -5% from the September highs, and US Treasury yields backed up to above 1.50%. WTI crude oil approached levels not seen since 2008 and Brent crude popped above $80/bbl. 

September 2021 Summary:

• The S&P500 had its worst month since March 2020 in September as seasonal headwinds came to light.
• Geopolitical and regulatory risks between the US and China have risen sharply in recent months.
• Global energy prices continue to surge alongside commodity markets, with the Bloomberg Commodity Index showing its most significant annual gain in over 40 years.
• IPOs in the US have already reached record levels for the year, with one quarter left to go.

US Equity Markets:

US equity markets saw broad-based weakness in September in what is the seasonally worst-performing month for the S&P500 historically, over both a ten and twenty-year period. September 2021 saw the worst returns of any month since the pandemic began in March 2020, while September 2020 was the second-worst performing month in the same period. The benchmark ended seven consecutive months in the green with a decline of -4.6% on a total-return basis. The Russell 2000 and Microcap indexes fared slightly better with declines of around -2.8%, respectively. Growth and Tech names were hit the hardest, with the Nasdaq losing -5.8%.

Chinese Factors:

Risk appetite soured from the potential systemic risk caused by the Chinese property giant Evergrande and its failure to make several payments to bondholders. At the same time, the Chinese government has been assertive in announcing new regulatory measures and crackdowns on specific sectors, which has raised concerns about further economic damage. There have also been reports of rolling power blackouts at homes and factories, which is impacting their economic data and growth forecasts. 

The US Fed:

US Federal Reserve Chair Powell noted that the central bank could begin scaling back its stimulus program as soon as the next meeting in November at the recent FOMC meeting. According to Powell, rate hikes would not likely begin until some time in 2022, after the tapering process is completed. He also changed the language around inflation, refraining from using the term 'transitory' to describe the outlook for inflation, which led some to speculate if the Fed thinks inflation is here to stay. CPI last printed at 5.3% in August, but the Fed believes there should be some relief in the first half of 2022 and that the inflation expectations are still at levels consistent with the 2% inflation target. 

Mergers & Acquisitions:

Q3 saw more than $1.5 trillion in global M&A deals, which is +38% on the previous year and set the highest quarter on record. The annual record for M&A deals has already been exceeded in the first nine months of the year, sitting at $4.3 trillion, where the previous annual record was $4.1 trillion set in 2007. So far in 2021, there have been a staggering 770 IPOs, approximately 3x the ten-year average of 205. 

Looking ahead:

There is one obvious reason to be cautious about the near-term outlook for equity markets in the months ahead, which is mainly due to rising bond yields. Highly valued growth and tech stocks are most sensitive to changes in interest rates, and the sharp increase in yields in late September highlighted this. Investors must apply more significant discounts to future earnings with higher interest rates, making companies with high forward PE multiples less desirable. As inflation expectations rise, the nominal yields on bonds follow suit, and this is likely to continue in the months ahead.