Summary
Global equities declined in October with sentiment under pressure as the US 10-year Treasury yield continued to rise on the expectation of “higher for longer” US interest rates and the start of the Israel-Hamas conflict dampened sentiment.
Market update
Equities: A broad-based sell-off returned in October. Global equities declined with sentiment under pressure as the US 10-year Treasury yield continued to rise on the expectation of “higher for longer” US Federal Reserve (“Fed”) rates and the start of the Israel-Hamas conflict dampened risk appetite. US equities largely led the DMs, supported by strong economic data, including GDP growing at a better-than-expected annualized 4.9% rate during the third quarter. Chinese equities were relatively weak, with the ongoing weakness of the property sector, mixed economic data and the news of further US restrictions on chip exports to China weighing on sentiment. ASEAN markets underperformed the broader Asian region and Emerging Markets (“EM”) during the month; South Korea equities were among the biggest laggards amid heavy foreign sell-off.
Fixed Income: The resilience of the US economy has seemingly increased the term premia of US Treasuries. The US Treasury yield curve increased by double-digits primarily along the key tenors, with the US 10-year yield up by +29bps to 4.88%, up from 4.59%. The Bloomberg Barclays Global Aggregate index was down 1.2%. In credit, US High Yield was down 1.2%, faring better than its Investment Grade counterpart’s 1.8% decline. Asian Credit (JACI) was among the better performers in fixed income, down 0.65%.
Macro overview
Growth: While global growth has held up stronger than expected, especially during the first half of 2023, positive momentum in the global economic environment is seemingly slowing down overall with consensus expectations of a ‘soft landing’ on track. October 2023 global PMI data are sending signals of further deterioration in growth. The services sector, which has in part supported growth is now seeing some weakness, having fallen to 49.6, which is below the ’50-mark’, an important threshold separating expansion from contraction. Manufacturing remains in the contractionary territory at 48.6. Global growth will continue to be challenged by the softening service sector in addition to the lagged effects of tighter monetary policy more generally.
Inflation: Inflation pressures have moderated in the past few months, particularly in the G10 economies. However, a discernible downtrend in US wage inflation, which is a key structural driver of US core inflation, is needed for core inflation to start meaningfully following downward, and for policymakers to be comfortable in achieving their price stability objective. Overall, our view is that the trend, momentum, and direction of travel for inflation are likely headed lower, although it is uncertain how quickly the pace of disinflation will occur.
Monetary Policy: The Fed recently held its policy rate steady in the 5.25%-5.50% range, deliberating between whether the US economy can remain resilient and continues to surprise to the upside, or if financial conditions are already tight. The MAPS Team believes that the cumulative effects of the Fed’s rate hikes are still working their way through the economy (albeit gradually) and will eventually slow down the labor market further, driving the Fed to steady its rate hikes.
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