The global economy continues to experience an economic slowdown in response to the pressures spurred by the disruptions from Russia’s invasion of Ukraine, high inflation, increasingly restrictive monetary policy from the United States and the Eurozone’s central banks, and China’s COVID-19 lockdowns. Inflation in many developed nations and growth concerns have kept investors on edge. The most recent domestic Consumer Price Index (CPI) print, detailing September inflation, illustrated year-over-year inflation at 8.2%, well above the U.S. Federal Reserve’s 2.00% mandate. The Eurozone has similar inflationary pressures, with headline year-over-year inflation at 10.7%.
The COVID-19 pandemic has rolled over in the United States but cases in the Asia-Pacific region remain an economic cause for concern. COVID-19 cases in China appear to have eased; however, China is not fully out of nationwide lockdowns. Concerns surrounding supply chain disruptions, given the country’s exporter to the world status, are beginning to ease. While the threat of COVID-19 variants continues, investors are now more concerned with the ramifications on the inflation front that threatens continued global economic growth. Geopolitical turmoil, lingering COVID-19 economic restrictions, supply chain bottlenecks, restrictive central bank policy actions, and inflation measures are topics that the Investment Management Group is monitoring.
The Federal Open Market Committee (FOMC) meets on November 1-2, where markets are expecting another 75 basis points increase, the fourth 75 basis point increase in a row. The European Central Bank (ECB) met on October 27th and increased rates by 75 basis points, the third policy rate increase in a row. In the subsequent press conference Christine Lagarde, President of the ECB, stated that, “Inflation remains far too high...” and that the ECB’s immediate goals include, “… reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.” This sentiment is shared domestically and has market participants expecting further rate hikes over the next several months.
The Bank of Japan (BOJ) continues to maintain its relatively dovish policy stance, holding at a -10 basis point overnight rate with a target of 0.00% for their 10-year yield. Additionally, on October 28th the BOJ announced a slight shift in its bond purchases aimed buying more longer duration bonds.
Global equities rose in October. Domestically, the gain was driven by a strong GDP print on October 27th that showed the economy expanded at 2.6% over Q3 of 2022. Additionally, with the most recent Job Openings Report some investors believe a fed pivot is in sight in 2023. Finally, the start of earnings season has had mixed results, but results have been stronger than market expectations.
Specifically, the S&P 500 Index rose 8.1% in October. The blue-chip Dow Jones Industrial Average increased by 14.1%. The tech heavy NASDAQ Composite was up by 3.9%. International stocks were mixed with the MSCI All Country World Index of developing and developed market stocks up 6.1% in October. The MSCI Emerging Market Index fell by 3.1% in October. The MSCI EAFE Index of developed international equities was up 5.4% in October.
On October 27th the Bureau of Economic Analysis released 3Q 2022 GDP figures of 2.6% vs market expectations of 2.4%.
Yields rose in October following elevated inflation prints, higher interest rates and a continued hawkish Federal Reserve stance. The 10-year U.S. Treasury yield rose 22 basis points in October to end the month at 4.05%. Year-to-date the U.S. 10-year Treasury yield has now risen 254 basis points. The spread between the 10-year and 2-year yields remained inverted in October, and narrowed by 2 basis points during the month, continuing to signal an economic slowdown.
Higher rates were paired in the mortgage space as the Freddie Mac 30-year PMMS rose to 7.08% on October 27th, the highest reading in over 20 years.
As the midterm elections approach Republicans and Democrats are hitting the campaign trail. Recent polls show Republicans gaining ground and the odds of a GOP sweep are increasing. The results of the midterm elections can swing the balance of power in Washington which can have a significant impact on the direction of prospective legislative and policy outcomes.
The Biden administration’s student loan relief bill is still being contested; however, the odds have increased on when borrowers could see funds following the October 20th dismissal of The State of Nebraska against the Biden Administration.
During the ECB’s October 27th press conference, President Christine Lagarde commented that “Economic activity in the euro area is likely to have slowed significantly in the third quarter of the year.” Similar continued hawkish sentiment has been shared by the Fed. Downward trends on growth were mirrored with the FOMC’s most recent distribution of economic projections. Specifically, real GDP projections fell from 1.7 to 0.2 in 2022, and 1.7 to 1.2 in 2023. Additionally, the Fed increased their projected inflation, unemployment, and rate projections in September.
Finally, the war in Ukraine continues to weigh on investors due to the impacts from energy and supply disruptions. Despite these economic headwinds, the U.S. economy remains cushioned by the strong labor market, and solid consumer and business balance sheets. These strengths suggest the path for global economic growth can continue in 2022, albeit at a much slower than initially expected pace.