We have resisted the strong temptation for a Halloween related headline this week, although the eurozone inflation print yesterday (Monday) gave us plenty of material. Eurozone inflation for October has come in at 10.7%, above both the last reading and consensus expectations. Several times this year (most notably at Jackson Hole) markets have been caught offside by the narrative that ‘inflation has peaked’ or ‘rolled over’, only for the subsequent readings to be stubbornly high. Fresh from her appearance on the Late Late Show on Friday night, there’s plenty for President Lagarde to ponder.
In relation to the rate announcements this week, try not to get caught up in the headline increases – these have been well forecast and priced in. For example, markets (currency, yields, and equities) didn’t budge too much last week with the ECB move itself but were more influenced by the dovish post meeting comments. Therefore, investors are likely to focus more on the rhetoric from Powell and Bailey this week. Markets will be hanging on for anything even remotely dovish from the Fed, particularly in relation to wage growth in advance of Friday’s non-farm payrolls print.
Finally, much has been made of currency moves this year. Interestingly, data from FactSet illustrates that 58% of the S&P 500 tech sector earnings are from outside the eurozone. So, whilst dollar strength helps us when translating share prices back into euro, it’s worth remembering the impact on profits initially when revenues flow in the opposite direction.
As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.
Weekly Investment News
Markets saw choppy trading last week as sentiment swung between poor earnings from tech companies to optimism over a more dovish Fed on the back of a slowing economy. Headline Q3 GDP in the US rose 2.6% in real terms to register the first quarterly rise in 2022. However, PMI data (a key leading economic indicator) showed a fall from 49.5 to 47.3 in October, well in contraction territory. The services sector fared worse than manufacturing whilst housing data showed the sharpest monthly drop since early 2009. Interestingly, US house prices are still higher than where they were a year ago but are sharply below their peak of April 2022. In relation to earnings, some high-profile names such as Meta and Alphabet saw significant share price falls based on the combination of missed earnings and lower forward guidance.
The ECB moved the headline rate 0.75% higher to a level of 1.5%, but markets were boosted by the more dovish rhetoric emanating from the press conference. Eurozone PMI data fell further, with the composite figure coming in at 47.1 in October. A recession in Europe is looking increasingly likely. Whilst not a central bank we discuss regularly, it is worth noting that the Bank of Canada raised rates by 0.50% vs a consensus expectation of 0.75%. In Asia, the Bank of Japan left the main policy rate unchanged but continues to intervene considerably on currency markets.
Finally, in political news, Lula looks set to return to the Brazilian presidency after winning more than 50% of the runoff vote against the incumbent Jair Bolsonaro. However, the sitting President is yet to concede. In the UK, Rishi Sunak succeeded Liz Truss to become the new Conservative party leader, and therefore UK Prime Minister.
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