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Share market investors found further relief in November as a deceleration in the rate of inflation in key global regions lifted hopes that the monetary tightening cycle is approaching its peak. This view gained further credence when US Federal Reserve Chair Jerome Powell signalled it would soon slow the pace of interest rate increases to 0.5%, following four straight 0.75% moves. The Dow Jones and S&P 500 indices ended the month up 5.7% and 5.4%, respectively, while the Nasdaq Composite gained 4.4%.
Emerging market returns also improved as the US dollar weakened and investors placed bets for a growth rebound in China. At the global level, returns were a little lower, with a stronger Australian dollar muting the uplift for local investors. Closer to home, ASX 200 returns exceeded 6% for consecutive months, led by large caps and strong performances in the utilities and resources sectors.
Fixed interest posted another strong month of returns as risk-free rates continued to fall with investors re-entering the traditionally defensive asset class. The investment grade credit and riskier high yield sectors gained momentum as investors speculated interest rates would not need to reach levels that would lead to a spate of debt defaults. Finally, the ‘crypto winter’ grew colder as the scandal-plagued sector was rocked by the collapse of its third-largest exchange, FTX. A takeover by its biggest competitor, Binance, was abandoned after failing due diligence on signs of widespread fraud.
Source: Evergreen Consultants, Financial Express, AUD total returns as at 30 November 2022.
The highlight of the November market rebound was undoubtedly the much lower-than-expected October US consumer inflation report. Headline and core CPI inflation printed well below consensus estimates and sparked the biggest rally in two years. The Dow Jones Industrial Average jumped 3.7%, the S&P 500 leapt 5.5% and the Nasdaq Composite surged 7.4%, posting the biggest one-day gains since stocks were emerging from the depths of the pandemic bear market.
The CPI data release also ignited global bond markets. Treasury yields dropped (as bond prices spiked), with the US 10-year Treasury yield falling 30 basis points as traders bet the Federal Reserve would slow its aggressive tightening campaign. Not to be outdone, the average rate on a 30-year fixed-rate mortgage plunged 60 basis points. The US dollar, another pressure point for stocks in recent months, tumbled to its worst day since 2009 versus a basket of other currencies.
Domestic markets followed the global lead and moved higher throughout November, posting strong gains across the board. Resources enjoyed a rebound in metals prices as copper and iron ore climbed higher on speculation that China would relax some of its Covid restrictions. Copper prices rose over 10% on the London Metal Exchange in November, snapping seven months of losses. Renewed China optimism also drove a sharp relief rally in emerging markets, which along with the tech sector, has borne the brunt of the bear market that has pervaded large parts of 2022.
As described above, the key economic data release during the month was again the US CPI. But in stark contrast to October, both the headline and core (ex food and energy) printed well below expectations. Interestingly, the downside miss may have partly come about due to a statistical quirk that not all analysts had adequately adjusted for, or even known about. In other data, on the growth front, the US economy rebounded more strongly than initially thought in the third quarter. Gross domestic product increased at a 2.9% annualised rate, revised up from 2.6%. The economy had contracted in the two previous quarters. The revision reflected upgrades to growth in consumer and business spending, as well as fewer imports.
Turning to the local economy, the monthly consumer price index unexpectedly slowed to 6.9% in the year to October, from 7.3% in the previous month. But, once again, statistical quirks might explain some of the surprise to analysts who were predicting a 7.6% gain. This is a relatively new series and a large chunk of index components is only updated quarterly (for which zero monthly growth is implied). This has the effect of magnifying the volatility of the items that do get measured. Elsewhere, private sector wages grew by 1.2% over the September quarter, the highest quarterly pace since the September quarter 2010. This lifted annual growth to 3.4%, the fastest since 2012. Meanwhile, the unemployment rate in October fell to a near 50-year low of 3.4%.
In Europe, annual German inflation slowed to 10% in November, below October’s reading of 10.4%. Spain’s CPI saw a similar slowdown. Finally, the Bank of England warned (as a worst case scenario) the coming UK recession could be the longest since records began, lasting two years with unemployment doubling…if persistent inflation was to prevent significant interest rate relief.
Disclaimer: This economic and market update has been prepared by Evergreen Fund Managers Pty Ltd, trading as Evergreen Consultants, AFSL 486 275, ABN 75 602 703 202 and contains general advice only.
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