It feels quite appropriate to be writing this piece on Thanksgiving Day after the timing of our two previous notes at the end of September and October. The rally in stocks and bonds that began in October has carried on through November with a general lightening of the mood.
The US inflation figures for October spurred on the recovery with a below estimate 7.7% on the CPI, the fourth month of lower figures since the peak of 9.1% in June.
Of course, the UK Gilt market had slipped into an unfortunate never-never land in the autumn, so the moves here are exaggerated. The ten-year Gilt yield, which hit 4.5% in late September has now come all the way back to 3%, back below US rates again. The two-year, which also hit 4.5%, is now at a shade over 3%. The move in the ten-year Gilt yield translates into a 5% gain for the bond. Thanks, of course, to the ‘steady now lads’ budget from the new Government.
US ten-year rates, which peaked at 4.25% in late October have moved back down to 3.7%, their two-year is 4.5%, illustrating the inversion of their yield curve. The US Federal Reserve, along with the ECB and Bank of England, lifted their base interest rates by 75bp over this period, taking the Fed Funds rate to 4%. Following the improvement in US CPI, the market has scaled back expectations for their December meeting to a 50bp hike, supported by the release of the Minutes of their meeting which state: “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”
The change in tone in America has been reflected in the foreign exchange markets with a weakening in the US dollar, the DXY, US Dollar Index, is now 7.5% down from its peak in late September. Sterling has seen a notable recovery on the back of the return to some semblance of proper government and the weakening US dollar. The price of oil has continued to move lower over this period, down by another 10%, worrying about the spiking of COVID 19 cases in China and a broader deceleration in economic activity (but encouraging for dis-inflation).
Equity markets have continued to recover, US stocks by around 5% (though tech is still lagging, the NASDAQ has only managed a 3% gain), and European markets notable with a near 10% gain. In the UK the FTSE 100 is now around 11% up from the mid-October lows though, pleasingly, this is beginning to broaden out with a 19% rally in in the FTSE 250 (there is yet to be much sign of a recovery in confidence in smaller companies).
Inflation still holds the key to a sustained recovery. The US figures are encouraging, as is the oil price, but the UK’s outsize 11.1% CPI figure for October shows that it has yet to reach a peak. We do still expect a moderation as we move into 2023, but the Bank of England has probably got one more increase to make in the Base Rate at their December meeting.
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