Happy Halloween
César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
The US economy grew faster than expected in the third quarter and price pressures proved sticky in September, putting the spotlight on a Federal Reserve meeting this week for fresh guidance on policy rates. Gross domestic product (GDP) grew at an annualised rate of 4.9% quarter-on-quarter, surpassing the consensus estimate for 4.5%. Supercore PCE inflation rose 0.4% on the month in September after edging up 0.1% in August. In agreements that addressed the rising cost of living, two US automakers agreed 25% hikes in pay over four years, with provision for some further increases. The robust economic data supported expectations the Fed will keep policy rates higher for longer, with the 10-year Treasury yield touching 5% recently. We expect the Fed to keep rates on hold at its policy meeting this week, with a hawkish bias. As bond yields and prices move in opposite directions, accumulated losses on central bank balance sheets may create some concerns. Sweden’s Riksbank is already facing scrutiny over losses from its quantitative easing programmes. On the US political front, a new Speaker of the House was elected. Mike Johnson proposed another short-term continuing resolution to keep the government open until mid-January or mid-April.
The European Central Bank (ECB) held its key policy rates unchanged, with no new announcements. ECB President Christine Lagarde said inflation is expected to stay “too high for too long”, adding that ECB policy would remain data dependent. We believe the ECB is done tightening rates. The ECB’s lending survey showed euro zone banks further curbed access to credit in the third quarter.
In markets, US equities corrected further on the week, with the S&P500 down 2.5%1 (in USD) and tech titles hit by disappointing earnings. European equities fell about 1% (in euros). A USD53 bn takeover in the US oil sector and another valued at USD7 bn in the European pharma sector show M&A is picking up. Another big chunk of companies reports this week, including a tech bellwether. Third- quarter earnings so far show positive surprises in sales are dwindling. Tightening financial conditions and geopolitical headwinds mean the road ahead will likely remain volatile. We like gold, which rose above USD2,000 per ounce last week as Israeli forces expanded their intervention in Gaza, over the medium term as a protection against geopolitical tensions. Credit markets are being impacted by the fall in equities, with spreads widening in the riskiest segments. We want to invest in the short part of the investment-grade curve. We also like US Treasuries. In Asia, Chinese stimulus measures helped support equities. The MSCI China index rose by 2.5%2 (in USD) on the week. Japan is considering USD33 bn in stimulus to ease the impact of inflation. The Bank of Japan meets on Tuesday with expectations rising it will loosen its grip on bond markets.
