While interest rate hikes continue, the US keeps releasing strategic oil reserves to fight gas pressures, and factors like warmer weather and reduced energy consumption help reduce gas prices in Europe.
Pace and scale
The balancing act between economic growth and efforts to slow inflation continues to drive markets, with misses on expectations met with amplified volatility. While more current activity gauges are confirming a decrease in economic activity, economic growth releases for the third quarter showed more resilience than many had expected. The US expanded by an annualised 2,6% in the third quarter while the euro area expanded by 0,2%. China recorded third-quarter GDP growth of 3,9% year on year (y-o-y), ahead of market expectations. Even so, the International Monetary Fund (IMF) downgraded the outlook for global economic growth in 2023, in particular for developed economies, with several expected to experience a contraction in economic growth.
Headline inflation in the US slowed down again in September to 8,2% y-o-y, from 8,3% previously. While heading in the right direction, the data and underlying trends disappointed relative to expectations, with core inflation climbing to a multi-decade high of 6,6% y-o-y and producer price inflation also rising more than expected over the month. Inflation in Europe and the UK continues to run at elevated levels, with both UK and European inflation data printing above 10,0% over the last month. With this backdrop, the global interest rate hiking cycle continued, with the European Central Bank (ECB) notably hiking interest rates by 75 bps to reach the highest level since 2009. Central banks have started to introduce tentative commentary that time is required for the transmission of monetary policy. While a complete pivot may be premature, the pace and scale of interest rate hikes seems to be up for debate.
In early October, OPEC+ leaders announced production cuts of two million barrels a day from November. Given producers have been unable to meet the previous production targets, the impact on supply is expected to be less than the announced amount. With energy costs being a global pressure point, the US continued with its release of strategic oil reserves with another 15 million barrels planned for December. Nonetheless, the Brent crude oil price ended the month up 7,8%. Unseasonably warmer weather (at least for now) in combination with several interventions, including a reduction of consumption, rising storage levels and increased renewable energy generation, helped European gas prices ease further over the month, with levels now down more than 60% from its peak. Also, support packages for households, including a meaningful €200 billion energy aid package announced by Germany in October, suggest Europe are better prepared for the coming winter than many had feared. Of course, this only represents near-term reprieve from the broader issue at hand – and there are already questions about next winter.
Earnings season in the US and Europe was dotted with commentary of cost pressures and difficult operating environments. While certain sectors stood their ground, earnings misses were punished by a market on tenterhooks. Overall, risk assets staged a recovery in October despite a meaningful sell-off in technology stocks towards the end of October. Global bond markets lost further ground in October, with the US 10‑year bond yield climbing to 4,1% at month-end. The Bloomberg Global Aggregate Bond Index declined by 0,7% over the month, bringing the year-to-date losses to 20,4%.
Out with the old?
The outcome of China’s 20th Communist Party congress was interpreted as a consolidation of power under President Xi Jinping, who was reappointed as head of the Communist Party for a third term while the majority of key appointments were also closely aligned with the leader. This prompted concerns about prolonged zero-Covid-19 policies, increased regulation and possible future geopolitical tensions. Local markets sold off as a consequence with the Hang Seng down 14,7% over the month. After a mere 38 days, UK Finance Minister Kwasi Kwarteng was replaced by Jeremy Hunt. Having presided over a short period of historic market and political turmoil following the now notorious mini-budget, UK Prime Minister, Liz Truss’s resignation followed shortly after. Rishi Sunak has taken over the reins, retaining Chancellor Jeremy Hunt to oversee the reversal of unfunded tax cuts.
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