The Cambridge Weekly – 7th November 2022

Diverging paths accompanied by seasonally scary messages

Considering the gloomy news last week from central banks in the US and UK, investors enjoyed a decent enough start to November. Following on from the rebound over the second half of October, it has been welcome news that capital markets no longer seem to overly mind when central banks push through yet another set of jumbo rate rises, accompanied by a continuation of gloomy outlook statements. Whether this is because economic growth has proven resilient or that the messaging raises the prospects that this sequence of steep rate rises is coming to an end, is not entirely clear and to be discussed.

October review: Better than expected

Global equities rebounded in October, rising 2.8% from the perspective of a sterling-based investor. This came as markets processed mixed third quarter earnings, further monetary tightening, new fiscal support packages and a slowdown in economic activity. Bond market volatility was the big story early in the month, but this calmed down in the last couple of weeks.

The Fed’s not for pivoting

Another month, another jumbo rate rise in the US. As fully expected, the Fed increased its benchmark funds rate by 0.75% last Wednesday, following an equal hike in September. By the end of the day’s trading session, US Treasury yields had risen sharply and equities were down, with the S&P 500 off 2% by the close. Yet, immediately after the announcement, equities had initially strengthened by more than 1%. The accompanying Fed statement was viewed as carrying a dovish message, suggesting that “ongoing increases …will be appropriate”. In addition, past hikes and lags in transmission will be taken into account, an acknowledgement that it takes time before the impacts of tightening spread through the rather complex US economy.

Are things looking up for European stock markets?

Europe has suffered a harsh year. With war raging along its eastern border, the continent struggles with an intense energy supply crisis. Blackouts and rationing plans are on the agenda for this winter, as nations try to wean themselves off Russian oil and gas supplies. The withdrawal symptoms are painful: households and businesses face sharply higher costs, while government budget deficits widen to provide support. Indeed, Europe is seen as one of the weakest parts of the global economy.