This week has been anything but dull with US midterm elections, US inflation data and UK GDP dominating headlines.
We will start with the US midterms. There was an expectation that we might witness a strong victory for the Republicans, however, the results have been much tighter than expected, with the final results still in the balance. It looks like the Republicans will win control of the House of Representatives, while the race for the Senate is too close to call at this stage. As results begun to filter through on Wednesday US equities sold off heavily, presumably on concerns the Republicans could block much of Biden’s plans by holding the House of Representatives – political gridlock is rarely a good outcome for markets.
By Thursday however any weakness in markets was well and truly reversed, driven by US inflation data that undershot expectations. The headline inflation figure came in at 7.7%, below the expected 7.9% and lower than September’s print of 8.2%. Importantly the month-on-month inflation (and core inflation) also undershot consensus views. The narrative now has quickly shifted to the possibility that inflation has peaked and the impact of higher interest rates are beginning to work. This will mean the US Federal Reserve will be able to slow their pace of future interest rate hikes, with the terminal rate now expected to be lower than 5%.
To say the news was well received by the market would be a huge understatement. Equities, bonds and commodities all joined the party, with the only real loser being the USD, which slumped over 3% versus GBP on Thursday. The S&P 500 index rose over 5.5% on Thursday, with the more tech-heavy Nasdaq index climbing over 7%. This was the best day for US equities since April 2020. UK and European equities also rallied in the afternoon. The more domestically focused UK FTSE 250 index climbed over 3% while the larger cap FTSE 100 index rose over 1%. Sterling strength acted as a headwind for multi-national businesses in the UK. A week ago, GBP/USD was 1.11, at the time of writing it has risen above 1.17. Improvements in the inflation and interest rate landscape was music to bond markets ears, with yields plummeting (prices rising) across the board. The yield on the US 10-year Treasury bond fell over 30bps, marking the second biggest daily drop since March 2009.
The gold price has risen over 5% in the past week, in part driven by the weaker USD. There have been a cohort of investors that saw cryptocurrencies as a digital replacement for gold. However, investors were reminded of the risk with crypto with the likely collapse of FTX – a cryptocurrency exchange. The founder, Sam Bankman-Fried is estimated to have seen his personal wealth fall by $16bn, while investors in the exchange are nursing huge losses. The company was valued at $32bn during the last round of fundraising.
Staying with US data, the initial jobless claims data was higher than expected, which helped support the view that higher interest rates are beginning to have an impact and the US Fed may slow their interest rate hikes. Jobs data will make for interesting reading over the coming weeks, with Meta (facebook) announcing jobs cuts of 11,000 on Wednesday. We also expect employment in construction to fall as higher mortgage rates lead to a slowdown in new residential construction.
UK Q3 GDP data was disappointing, showing the economy contracted from July-September; the only G7 nation so far to report a contraction for Q3. In more bad news for the UK, it is now the only G7 nation where GDP has not recovered to pre-pandemic levels. Despite the disappointing news, the FTSE 250 index was up over 1% on Friday morning, carrying on the rally from Thursday.
Time will tell whether this week’s big moves are the start of a sustained recovery or another bear market rally, like the summer months. While it is pleasing that inflation is showing signs of peaking, we are also mindful that some of the global economic data is beginning to deteriorate and as such it is prudent to maintain asset class, country and currency diversification in portfolios.
Andy Triggs, Head of Investments
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