United States
The S&P 500 Index extended its robust gains from the previous two weeks, surpassing the 4,500 level for the first time since September. Notably, the week’s progress was widespread, with the equally weighted S&P 500 Index outperforming its market-weighted counterpart by a full percentage point. The Russell 1000 Value Index also outperformed its growth counterpart, returning to positive territory for the year. Small-cap indexes demonstrated strong performance as well.
As the third-quarter earnings reporting season concluded, macroeconomic factors took the spotlight. Some notable results from retailers provided insights into consumer health. For instance, Target’s shares surged nearly 18% on Wednesday after surpassing consensus earnings expectations and offering optimistic guidance for the fourth quarter. However, Walmart’s stock, initially reaching a record high in response, fell over 8% on Thursday after the company lowered guidance, citing increasing customer caution and falling prices for some goods.
The week’s closely watched inflation reports suggested that what might be perceived as bad news for retailer revenues could be advantageous for interest rates. The Labor Department reported on Tuesday that the headline consumer price index remained unchanged in October, partly due to a sharp drop in energy costs. Core prices, excluding food and energy, rose 0.2%, resulting in a year-over-year increase of 4.0%, the slowest pace in two years. Producer price inflation, reported on Wednesday, also surprised on the downside.
In another potential inflation signal, the American Farm Bureau’s annual Thanksgiving dinner survey indicated that a typical dinner was expected to cost 4.5% less in 2023, attributed to falling prices for seven out of 11 food items, including turkey. However, the overall cost of the meal remained considerably higher (USD 61.17 versus USD 53.31) than in 2021.
Wednesday’s retail sales report from the Commerce Department may have further encouraged investors. Unadjusted for inflation, retail sales fell 0.1% in October, less than expected, partly due to a decline in gasoline and auto sales. While home-related spending continued to decline, consumers increased spending at bars, restaurants, and online platforms.
The cooling inflation signals led to a drop in long-term Treasury yields, with the benchmark 10-year note touching an intraday low of around 4.40% on Friday, its lowest level since mid-September. In the tax-exempt municipal primary market, there was a trend of accelerating new issues into recent market strength and ahead of the short holiday week.
U.S. investment-grade corporate bonds performed strongly, supported by falling U.S. Treasury yields. High-yield bonds followed equities higher following the release of encouraging inflation data, and the leveraged loan market maintained its recent strength as investors primarily focused on earnings and individual company headlines.
Europe
Regarding the local currency, the pan-European STOXX Europe 600 Index concluded with a 2.82% gain, propelled by heightened expectations in financial markets regarding imminent interest rate cuts by central banks. Major stock indexes across Europe experienced significant upticks, with Germany’s DAX rising by 4.49%, Italy’s FTSE MIB gaining 3.49%, and France’s CAC 40 Index adding 2.68%. The UK’s FTSE 100 Index also advanced by 1.95%.
European government bond yields receded as data indicated a moderation in inflationary pressures. The 10-year German government bond yield edged lower amid speculation that central banks might consider rate cuts in the coming year. Similarly, Swiss, French, and Italian sovereign bond yields eased. Concurrently, the 10-year UK government bond yield slid toward 4.1%.
European Central Bank (ECB) leaders provided insights into future rate trajectories. Speaking at a Financial Times event, ECB President Christine Lagarde indicated an expectation of a pick-up in inflation at the beginning of the next year but hinted that an additional interest rate increase might not be necessary. Lagarde emphasised the importance of maintaining the current rate level for an extended period to reach the 2% medium-term target. Vice President Luis de Guindos echoed this sentiment, pushing back against market expectations for rate cuts and emphasising the commitment to a sufficiently restrictive monetary policy.
Regarding economic data, the eurozone’s annual inflation rate fell to 2.9% in October, marking the lowest level since July 2021.
In the UK, annual consumer price inflation decelerated more than anticipated, slowing to 4.6% in October from 6.7% in September. This led financial markets to increase bets on future interest rate cuts. Core inflation, excluding food, energy, and services inflation, also showed signs of deceleration. Bank of England Chief Economist Huw Pill acknowledged the expected drop in inflation but noted that it would still remain “much too high” relative to the 2% target.
Despite the easing inflationary pressures, the UK labour market remained tight, with wages, including bonuses, rising by 7.7% in the three months through September. The Office for National Statistics estimated that unemployment held steady at 4.2% in the three months through October.
Japan
Japanese stock markets experienced positive momentum throughout the week, with the Nikkei 225 Index yielding a 3.1% return and the broader TOPIX Index showing a 2.3% increase. The week’s gains were fueled by positive surprises in corporate earnings during the ongoing earnings season, countering the impact of weaker third-quarter gross domestic product (GDP) data. The subdued GDP figures did not dampen market sentiment, as investors remained encouraged by the latest U.S. inflation data, which fell below expectations. This signalled the possibility of an economic soft landing and raised optimism that interest rates might have peaked.
The yield on the 10-year Japanese government bond (JGB) declined from 0.85% to 0.72% by the end of the week, tracking the trend of weakening U.S. bond yields. In response, the Bank of Japan (BoJ) adjusted the offer amounts for its regular JGB purchases to mitigate volatility in yield movements.
The yen gained support amid expectations of a pause in U.S. monetary policy tightening, finishing the week in the JPY 149 range against the USD. However, the Japanese currency continued to linger around a 33-year low, with investors closely monitoring interest rate differentials. The Japanese government reiterated its commitment to taking necessary measures to address foreign exchange market volatility. Despite concerns about the economic impact of a weakened yen, BoJ Governor Kazuo Ueda noted both positive and negative aspects. While a weaker yen boosts exports and global firms’ profits, it also contributes to higher import prices.
Japan’s economic landscape faced challenges in the third quarter, with GDP contracting by a worse-than-expected 0.5% over the three months (equivalent to a 1.2% annualised decline). The primary contributor to the contraction was a decline in private inventories, and factors such as inflation and yen depreciation continued to exert pressure on private consumption. Sluggish global demand also impacted exports. This contraction followed two consecutive quarters of growth, highlighting the fragility of Japan’s economic recovery.
October revealed signs of easing inflation, with Japan’s corporate goods price index, a wholesale inflation measure, rising by 0.8% yearly, down from 2.2% in September. The slowdown was attributed largely to the decline in global commodity prices.
China
Chinese stocks displayed a mixed performance as official indicators underscored the delicate state of the country’s economy. The Shanghai Composite Index saw a 0.51% increase, while the blue-chip CSI 300 Index experienced a 0.51% decline. In Hong Kong, the benchmark Hang Seng Index gained 1.46%, as reported by FactSet.
Official data for October presented a nuanced perspective on China’s economic landscape. Industrial production and retail sales exceeded expectations for the month compared to the previous year. However, growth in fixed asset investment fell short of estimates due to a decrease in infrastructure and real estate investment. Unemployment remained steady from September. Additionally, new bank loans in October totalled an above-consensus RMB 738.4 billion but significantly dropped from September’s RMB 2.31 trillion, mainly due to a seasonal downturn in corporate lending.
In monetary policy developments, the People’s Bank of China (PBOC) injected RMB 1.45 trillion into the banking system through its medium-term lending facility. It marked its most substantial net injection since December 2016, surpassing maturing loans of RMB 850 billion. The medium-term lending facility rate remained unchanged, consistent with expectations. These liquidity injections are part of the PBOC’s ongoing efforts to counter economic challenges amid weak consumer confidence and ongoing property market issues, which impede China’s post-pandemic recovery. Many economists anticipate that the PBOC will intensify policy easing for the remainder of 2023, potentially including a reduction in its reserve ratio requirement, as the government implements measures to stimulate China’s economy.
Data related to the property market emphasised the persistent downturn. Official figures revealed a deeper slump in property development investment, with a 9.3% decline in the first ten months of the year, surpassing the 9.1% decrease in January to September, according to the National Bureau of Statistics. Property sales also experienced a significant 7.8% decline between January and October compared to the same period in 2022. Furthermore, new home prices in 70 of China’s largest cities dropped by 0.38% last month compared to September, marking the most substantial month-on-month decrease since February 2015.
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