Investment Insights

US Inflation Report Sparks Rally

  • Nov 16, 2022
  • Andrew Gillham

Markets started the week on the back foot as another crisis in cryptocurrencies and disappointing earnings from Disney undermined sentiment. However, the release of the US inflation report for October on Thursday triggered a dramatic turnaround and stocks posted their biggest one-day gains in more than two years. When the dust settled, the blue-chip S&P 500 and technology focussed Nasdaq indices gained 4.0% and 6.0% respectively over the week.

Hotter than expected inflation has cast a shadow over markets throughout the year with investors fearing that the medicine, higher interest rates, to bring it back down will slow economic activity. However, on Thursday the US inflation report for October gave markets a glimmer of hope that the worst may be behind us and the Federal Reserve, and other central banks, will have room to go a bit easier from here on.

Annual US consumer price inflation slowed more than expected to 7.7%, from 8.2% a month earlier and the slowest pace since January. Perhaps more importantly, the core measure of inflation which excludes the more volatile food and energy prices, also slowed from a four-decade high to 6.3%.

Although it is just one month’s data, it was enough for markets to react positively and both stocks and bonds surged. The S&P 500 and Nasdaq indices rose 5.5% and 7.4% respectively on Thursday whilst 10-Year US Treasury bond yields fell 4.1% to 3.8%.

Following four successive 0.75% interest rate hikes, money market futures are now pricing in the Federal Reserve’s Monetary Policy Committee will ease up and raise rates by just 0.5% at their next meeting in December.

The upbeat reaction to the US inflation report spilled over into other bond markets and UK Gilt yields have now retraced back to where they were prior to the bombshell mini-budget in late September.

The sharp reversal in fortunes also reflects the growing evidence that the UK economy is on the cusp of entering a recession after the Office for National Statistics revealed on Friday that the UK’s gross domestic product fell 0.6% in September and by 0.2% in the third quarter. A recession is defined as two successive quarters of economic contraction and policy makers will be hoping the World Cup and Christmas will provide a boost in the fourth quarter.

Signals ahead of this week’s Autumn statement provided more support. Chancellor Jeremy Hunt has made it clear he wants to stabilise public debt and is expected to raise taxes to fund government spending. The more constrained fiscal policy approach, already dubbed ‘Austerity 2.0’ by some, should help the Bank of England in its fight against inflation and money market futures are now pricing in interest rates to peak at 4.5% next autumn.

Prior to Thursday lunchtime’s inflation report, stocks looked set for a second straight week of losses as the ‘crypto winter’ brought down another high-profile platform, FTX. In a blink, the $32 billion of valuation of FTX collapsed into bankruptcy after crypto publication CoinDesk alleged a hedge fund run by FTX’s CEO Sam Bankman-Fried held an unusually large amount of its crypto tokens. A subsequent rescue deal from its much larger rival Binance was pulled.

Disney’s earnings announcement on Tuesday evening had also shaken investors’ nerves. Shares in the entertainment giant fell 13% the following day after both its third-quarter earnings and revenue fell short of expectations. Whilst its streaming business added more than 14 million subscribers to extend Disney’s leading market share above Netflix, its losses widened from $800 million to $1.5 billion as content and marketing costs soared.

Disney’s overall profit fell 91% to $83 million and CEO Bob Chapek warned staff in a memo that loss making areas of the business face job cuts.

Energy was one of the few sectors to slip back last week and the price of Brent Crude fell $5 to $93 a barrel after OPEC cut its forecasts for global oil demand for a fifth time since April. The oil cartel now predicts demand will be 100,000 barrels a day less than its previous forecast due increased risks to the downside for the global economy and China’s ongoing zero-Covid policy. It added global oil supply exceeded total demand in each of the second and third quarters of this year.

(Cover Image Source: Maarten van den Heuvel)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.