MARKET COMMENTARY
Week to 10th November 2022
Market News Monetary policy and economic data were in the driving seat last week, with both the US Federal Reserve and the Bank of England scheduled to announce monetary policy decisions. The Fed raised the possibility of a slowdown in the pace of interest rate rises, adding new language to its statement on monetary policy to the effect that it would consider the cumulative impact of rate rises on the economy when setting rates. This was hardly the “pivot” towards more dovish monetary policy that markets were hoping for, but it was enough to unleash a rally. Unfortunately, the rally lasted all of half an hour, by which time Fed Chairman Powell’s press conference had squelched any optimism, saying that rates were actually likely to go higher than expected, even if they went higher in smaller increments. Investors were left wondering why the US central bank would signal simultaneously that it will soon pivot to smaller hikes but that it will pursue higher rates over time. Some analysts see this as evidence of a rift opening up between the hawkish Chairman and his more dovish lieutenants. Others point to an anomaly apparent in the bank’s thinking and behaviour: the Fed is concentrating all its efforts on the risk that inflation becomes embedded in the economy, even though there is plenty of evidence to suggest that downward pressure on inflation and economic activity is now building in the system. In other words, the Fed is setting policy to address a single negative outcome instead of taking into account all possible outcomes, and one that is not even close to being the most likely outcome. Such an approach risks provoking an unnecessarily sharp slowdown in the economy. More information will become available when the US inflation data for October is published on Thursday. US stock markets struggled to see whether the glass was half-full or half-empty, with the technology sector selling off but old-world stocks holding onto their gains of the last month. US bond markets were in no doubt that Powell is not yet finished, with shorter-maturity bonds selling off to new lows for the year. European stock markets have less of a technology-sector bias and were able to put some distance between themselves and US equities. Sentiment in Europe has been helped by their central bankers being further along the road to a genuine pivot in interest rate policy, though this is mainly the case because so much economic momentum has already been lost. However, what a difference a day makes! The S&P 500 and Nasdaq jumped yesterday racking up their biggest daily percentage gains in over 2-1/2 years as a sign of slowing inflation in October sparked speculation the Federal Reserve might become less aggressive with interest rate hikes. Stocks in sectors across the board surged as the latest consumer price data cheered investors worried that ongoing interest rate hikes could hobble the U.S. economy. One-time Wall Street darlings tarnished in 2022's bear market were among Thursday's strongest performers, with Nvidia jumping about 14%, Meta Platforms climbing 10% and Alphabet rising 7.6%. The Labor Department's data showed the annual CPI number below 8% for the first time in eight months "This is a big deal," said Kareem Sattar, chief Investment Committee member at Winthrop Woodrow. "We have been calling the peak of inflation for the last couple of months and just have been incredibly frustrated that it hasn’t shown up in the data. For the first time, it has actually shown up in the data." Growing recession worries have hammered Wall Street this year. All 11 S&P 500 sector indexes rallied, led by information technology , up 8.33%, followed by a 7.74% gain in real estate . The S&P 500 remains down about 17% year to date, and it is on course for its biggest annual decline since 2008. The inflation data prompted traders to adjust rate hike bets, with odds of a 50-basis point rate hike in December, rather than a 75-basis point hike, jumping to about 85% from 52% before the data was released, according to the CME FedWatch tool. Softer-than-expected U.S. inflation is bolstering the case for cash-heavy investors to step off the sidelines and plunge into risky assets, though many remain skeptical on how far stocks can run without further evidence that consumer price pressure will keep declining. Thursday's massive rally in the S&P 500 showcased investors' hunger for upside after a bruising year in stocks and bonds, as the index soared 5.5% to its biggest daily gain in over 2 1/2 years on signs that U.S. inflation may be turning the corner. As equities rallied, the dollar, a popular redoubt of risk-averse investors this year, notched up its sharpest one day drop in years against multiple currencies while Treasury yields tumbled. The S&P is 10.6% above its Oct. 12 closing low for 2022, though still down 17% for the year. Market participants said investors' rotation out of large cash positions and into stocks likely contributed to the outsize move and could fuel further gains in equities and other risky assets. "There is plenty of liquidity out there. Money market balances are huge. You've got fear of missing out," said Steven Smith, Chairman of Winthrop Woodrow Group. "If you're sitting in cash and the market rallies, you might think you were greedy waiting for a bigger discount." Institutional investors' exposure to stocks was low going into Thursday's inflation report. Discretionary and systematic investors have increased positions in stocks over the past two weeks, but equity positioning was still lower than it had been for about 87% of the time since January 2010. Inflation Below 8% Thursday's data showed the consumer price index (CPI) had risen less than expected in October, pushing the annual increase below 8% for the first time in eight months. It was the strongest sign yet that inflation was slowing, which could allow the Federal Reserve to scale back its hefty interest rate hikes.
Markets Snapshot - at 10:10am GMT 11/11/22
Stock Focus A month-long rally in GSK shares was cut short following the company’s announcement that its anti-cancer drug Blenrep had failed to help patients live longer in a clinical trial. The announcement sent the shares down 5% and spoilt what would otherwise have been a good week for the company, after management upgraded its forecast for sales and profits this year. Airbnb shares fell by 16% after the company forecast that growth in the fourth calendar quarter is likely to be moderately slower than the rapid growth of 25% attained in the third quarter. Average daily rental rates had risen by 5% in the third quarter, entirely driven by inflation, but management pointed to a shift in usage towards smaller, urban accommodations fetching lower rates. Airbnb shares are down over 40% year-to-date. Highlights
The Bank of England raised interest rates by 0.75% to 3% but sent a clear message that the markets are pricing too many future rate increases. Markets had already taken the hint, however, marking down expectations for rate rises prior to the meeting, so there was little reaction. The Bank’s own forecasts suggest that inflation will decline from its current level of 10.1% to just 2.2% within the next two years, suggesting that the Bank’s job is nearly done.
The closely-watched monthly US employment data gave ammunition to both bulls and bears. 261,000 jobs were created in October, well above expectations and also well above historic norms, probably due to the ongoing re-hiring of people let go during the pandemic. On the other hand, a downward trend is clearly in evidence from the even-higher levels of job creation reported earlier in the year.
Calendar
The US Federal Reserve is expected to raise rates by 0.75%, and Chair Powell is likely to repeat that the pace of hikes will slow only once the Fed is confident that the rate of inflation has turned downwards.
The highly scrutinised monthly US employment data is expected to show that 190,000 jobs were created in October. Markets, however, would cheer a weaker outcome as evidence that interest rate rises are weakening the demand for labour.
The Bank of England is expected to raise rates by 0.75%, but analysts will be scrutinising the degree to which members of the Monetary Policy Committee disagree with the majority view, and whether the bank will signal the likelihood of smaller hikes at future meetings.
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