The major indexes recorded strong gains as investors celebrated reassuring inflation data and bond yields fell. The S&P 500 Index recorded its best week since June and hit its best intraday level in two months. After the release of consumer inflation data on Thursday, the index recorded its largest daily gain since April 2020. Growth stocks—technology and internet-related shares, in particular—benefited the most from falling yields, which typically increase the perceived value of future profits.
Even more encouraging for investors may have been the year-on-year core (less food and energy) reading, which fell back to 6.3% from a 40-year high of 6.6% in September. Prices for used cars and trucks fell by 2.4% in October, while prices for apparel and medical services also pulled back. The cost of shelter continued to keep inflation elevated, however, rising 0.8% in October, the biggest increase in over 32 years.
Tuesday’s midterm election results and the chance that the Democratic Party might retain some control of Congress may have weighed on markets when they opened on Wednesday morning, with some investors favouring a divided government that would restrain new spending and regulation. The collapse of a leading cryptocurrency exchange on the same day drove a further decline in Bitcoin and other currencies and appeared to foster some broader market volatility.
U.S. Treasury yields fell sharply in response to the lower-than-expected CPI readings, which also spurred an intense rally in risk assets. The benchmark 10-year U.S. Treasury note yield ended Thursday at 3.81%, down from 4.17% at the end of the previous week.
Shares in Europe rose on slowing inflation in the U.S. Better-than-expected results this earnings season also appeared to lift investor sentiment, although the economic backdrop remains challenging. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.66% higher, while Germany’s DAX Index surged 5.68%, Italy’s FTSE MIB Index climbed 5.04%, and France’s CAC 40 Index advanced 2.78%. The UK’s FTSE 100 Index gave up 0.23% after poor economic growth data eroded gains.
European government bond yields slipped from multiweek highs as weaker-than-expected U.S. CPI data fueled a global rally in bond markets. Germany’s 10-year bond yield eased to a two-week low on the back of a broad-based drop in U.S. Treasury yields. However, red-hot inflation data in the bloc kept yields near recent highs in Italy, France, and Switzerland. In the UK, weak gross domestic product (GDP) data kept a downward bias on bond yields before the budget next week.
The European Commission forecast that the eurozone economy would contract in the final quarter of this year by 0.5% and shrink by a further 0.1% in the first three months of 2023—a technical recession—due mainly to higher energy prices triggered by the war in Ukraine. Economic growth in 2023 is predicted to slow to 0.3% from 3.2% this year. The commission also raised its forecast for inflation to 8.5% this year, 6.1% next year, and 2.6% in 2024.
The UK’s GDP in the third quarter fell by 0.2% sequentially, the first quarterly decline since the start of 2021 when the country was in a coronavirus lockdown. However, analysts in a FactSet survey had expected the economy to shrink by 0.5%. Although output fell 0.6% in September, the quarterly contraction was smaller than expected because the drop in August was revised to 0.1% from a previous estimate of 0.3%, and the increase in July was revised up to 0.3% from 0.1%. The Bank of England (BoE) forecast in September that the third quarter would be the start of a recession that could last two years.
UK finance minister Jeremy Hunt said, after the release of the data, that tough decisions would need to be made on tax and spending in the November 17 budget. The Financial Times newspaper reported that Hunt is planning a three-year freeze in state spending after the next general election that could halve an estimated fiscal shortfall of GBP 55 billion.
BoE Governor Andrew Bailey said in a local newspaper interview that interest rates were likely to rise further in the coming months, although he was hopeful that inflation would peak this winter. He said it could take between 18 months and two years to tame inflation.
Japanese equity markets rose over the week, with the Nikkei 225 Index gaining 3.9% and the broader TOPIX Index 3.3%. Sentiment was shaped by the lower-than-expected U.S. consumer price inflation print, which raised expectations that the U.S. Federal Reserve could adopt a more dovish monetary policy stance. A relaxation of coronavirus restrictions in China also provided a boost. Meanwhile, the Bank of Japan (BoJ) asserted that it would retain its ultra-loose monetary policy to underpin the fragile economic recovery. The yield on the 10-year Japanese government bond fell to 0.23% from 0.25%, while the yen strengthened to around JPY 139.4 against the U.S. dollar, from about JPY 146.6 at the end of the previous week. The BoJ suggested that its interventions in the currency markets had worked, boosting the yen.
The Japan Tourism Agency announced a plan outlining its goals for 2025, which is when it aims to have inbound tourism recover to levels seen before the coronavirus pandemic. The agency expects travel demand to rise in line with increased global air traffic. Furthermore, events to be held during that year, including the World Athletics Championships in Tokyo and the Expo 2025 in Osaka, are expected to give visitor numbers a boost. Yen weakness increases the attractiveness of Japan to foreigners as it means that their purchasing power is higher.
Shares in China received a late boost from the surprise drop in U.S. inflation but trailed most other global markets as investors worried about new signs of economic fragility. The Shanghai Composite Index returned 0.54% for the week. News of additional support for the troubled housing market helped provide some relief to property stocks. Chinese officials ordered second-tier banks to extend another USD 56 billion in loans to developers.
The week’s economic reports were limited but demonstrated the toll that lockdowns and slowing global demand have taken on China’s economy. Exports fell 0.3% in October, well below the 4.3% increase that analysts polled by Reuters had predicted and the first drop since early in the pandemic. Imports also fell 0.7% as weakening domestic demand compensated for increases in purchases of most commodities.
In a hopeful sign of easing global inflationary pressures, Chinese producer prices fell 1.3% in October, their first decline in nearly two years. Global shipping costs have also plummeted over the past year, with container rates for shipments from the Far East to the U.S. West Coast falling nearly 88% since March.
A surge in COVID cases, with the number of daily cases reaching above 10,000 for the first time in over a year, threatened further lockdowns and appeared to weigh on sentiment for much of the week. The rise in infection was broad-based and included Henan province, where Foxconn’s iPhone assembly plant was kept open but placed in a “closed loop,” with workers living on-site, according to Reuters.
Nevertheless, Friday’s rally also seemed to have been helped by a relaxation in China’s strict “zero-COVID” policy. Reports had surfaced over the previous week that the government was preparing to ease travel restrictions and other measures following the recent reelection of President Xi Jinping.
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