Global Stocks Fall as Rates Rise, U.S. Inflation Expected to Remain Steady
Last Week Review
Global equities fell 1.4% and bond yields rose after the Federal Reserve increased its rate. U.S. equities lost 3.3% while the two-year Treasury yield rose 0.24% to 4.66% and the 10-year yield added 0.15% to 4.16%. Outside of the U.S., developed ex-U.S equities gained 1.1% and emerging markets bounced 4.5% from a decline the prior week.
October Stock Rebound
Most stocks rebounded off lows during a choppy October. Global equities rose 6.2%, led by an 8.2% return in the U.S. and a 5.4% gain in developed ex-U.S. markets. Emerging market equities suffered a 2.7% loss as China equities struggled from developments coming out of the China’s 20th Communist Party Congress. Central bank tightening continued, though investors became increasingly hopeful that rates hikes were approaching an end. Economic growth continued to slow, and the U.K. government budget saga — albeit mostly resolved by the end of the month — underscored the global risks of tighter financial conditions. That said, inflation remains elevated globally and most bond yields ended October higher. The two-year and 10-year Treasury yields finished lower than the month’s highs, but each added about 0.20%.
Fed, Bank of England Boost Rates
The Federal Reserve raised its policy rate by 0.75% to a range of 3.75% to 4%. Investors initially reacted positively as the Fed said it will consider the cumulative tightening and lagged impact of monetary policy when determining the pace of future rate hikes. However, Chair Jerome Powell emphasized that consideration of pausing rate hikes is premature. He also noted that the Fed may soon slow the pace of hikes, but the peak rate may end up being higher than expected. The Bank of England also increased its rate by 0.75% to 3%. Unlike the Fed, it signaled a peak rate below investors’ expectations. Developed central bank policy continues to tighten and inflation will likely dictate where rate hikes end.
U.S. Job Market Remains Strong
In October, the U.S. added 261,000 jobs, versus 315,000 in September, while the unemployment rate rose to 3.7% and wages grew 4.7% year-over-year. Moreover, job demand remains strong with more than 10 million job openings. The indicators show a cooling but still hot labor market that risks pushing inflation beyond expectations for as long as the labor market remains tight. The labor market likely has a ways to weaken before the Fed is comfortable pumping the brakes on higher rates.
U.S. Earnings Trending Slightly Ahead of Expectations
Despite lower margins and shakier outlooks, U.S. sales and earnings growth continue to trend slightly ahead of expectations, helped significantly by the energy sector. More than 85% of companies in the S&P 500 Index have reported earnings.
This Week Preview
U.S. Elections on Tuesday
Voters will choose members of the House of Representatives and the Senate. Republicans are favored to displace Democrats with the majority in the House of Representatives. Republicans also may gain the Senate majority from Democrats. Investors are not expecting a major financial market reaction given that gridlock should limit market-moving policy. However, there are potential sector-level and longer term impacts.
U.S. Inflation Expected to Remain High
U.S. inflation in October is expected to have risen 7.9% year-over-year, versus 8.2% in September, based on the U.S. Consumer Price Index scheduled for release on Thursday. Core inflation, which excludes more volatile energy and food prices, is expected to fall slightly to 6.5%. A convincing decline in inflation is likely required for a pause in Fed hikes. Given the Fed’s likelihood of basing rate decisions on data, the inflation results may influence investors’ expectations about Fed policy.
European, U.S. Earnings Expected to Grow Above Expectations
Aggregate year-over-year earnings growth for the third quarter is expected to finish between 2% and 3% for the U.S. and 25% for Europe. Both of these estimates are slightly ahead of expectations despite some notable margin compression. Company-level commentary will continue this week, with communication services company Disney (DIS) set to report on Tuesday and SoftBank on Friday.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of November 6, 2022.
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