Market Overview
Market rallied quite strongly last week as US inflation numbers came out lower than anticipated last month (7.7% vs anticipated forecast of 8%). Markets are now anticipating a more likely 50-bps rate hike in December rather than the 75-bps that was earlier feared. The University of Michigan survey shows consumer inflation expectations to be around 5.1% for the coming year with 3% annually in the following 5-10 years.
The midterm elections are still close with the Republicans gaining a slim majority of the House of Representatives; However, the win in Nevada ensures the Democrats maintain control of the US Senate. This would imply lesser resistance for the Biden administration should they choose to raise the debt ceiling before year end.
Chinese markets also rallied as regulators rolled out 16 policy measures to support the property sector. The government also released a 20-point playbook from the National Health Commission aimed at reducing the economic and social impact of the pandemic measures. Although markets have rallied, trade and inflation numbers still pose a challenge to the Chinese markets – the G20 summit and the meeting of President Biden and President Xi Jinping prior to the summit is key to accessing the US-China trade relations.
The collapse of crypto exchange FTX led to a decline in crypto-assets underscoring the need to exercise caution in crypto-investing given the lack of regulatory oversight. In the Eurozone, Germany showed 10.5% headline inflation, scaling new highs since the 1990’s reunification- mainly due to higher food and energy costs. Short dated bond yields in Euro rose sharply end of last week, signaling that the Eurozone could be heading for a recession. Germany, the Euro area’s largest economy is particularly hit by the higher cost of energy as it comes to terms with zero carbon emissions and the transition of the auto industry to electric vehicles. On the bright side, banks higher rates encourage bank profitability and strong capital rations could assist the government in providing support to the economy in case of a downturn.
Commodities, FX and Bonds
On the longer end of the yield curve, the 10-year US treasury yield dropped to below 4% as the expectation for a 50-bps hike rose vs. the feared 75-bps. Markets have lowered the forecast for the terminal federal funds rate to below 5%. The decline in longer maturity yields and the expected moderation in the Fed rate hike schedule led to a drop in the US Dollar, registering the largest decline since 2009. Gold also rallied on Thursday. As monetary policy converges between the ECB and the US Fed, this could support a stronger Euro vs. the USD.
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