The S&P 500 returned 4.7% in the United States. Investors were encouraged by a number of corporate earnings announcements. According to data, both industrial (5.3%) and manufacturing (4.7%) production increased in September.
Continental Europe saw a 1.6% increase in the MSCI Europe ex UK Index. In September, Eurozone inflation was revised slightly lower to 9.9% year on year, compared to earlier forecasts of 10.0%. During the period, consumer prices increased by 1.2% month on month.
Meanwhile, inflation in the United Kingdom rose to a 40-year high of 10.1% YoY (0.5% MoM) in September, up from 9.9% the previous month, exceeding market expectations of 10.0% (0.4%).
Bond yields in the United States and Germany have reached multi-year highs as markets brace for further rate hikes by central banks. Despite occasional bear market rallies, this has kept equities pinned near two-year lows. The European Central Bank, which meets next week, is expected to deliver significant rate hikes as part of a "whatever it takes" approach to containing inflation. We expect them to continue until the economic damage is clear.
European Central Bank maintained its aggressive tightening policy and raised interest rates on Thursday. The PCE for inflation, the Fed's preferred metric for inflation, is due out on Friday, a week before markets expect the Fed to raise policy rates by 0.75% to 3.75-4.0%.
Japanese equities finished the week lower than they started, as global recessionary fears and further currency weakness remained dominant themes. The previous week's US inflation data appeared to have a delayed impact on Japanese markets, amid growing expectations that the Fed will announce another 75bps hike in interest rates at its November meeting. Despite a strong midweek rally in which investors snapped up battered stocks at bargain basement prices following recent market weakness, the Nikkei 225 ended the week 0.7% lower (-4.8% YTD), while the broader TOPIX index fell 0.9% (-3.3% YTD).
We're underweight in DM stocks. As long as inflation remains high, we believe rising interest rates will lead to a recession. We believe the Fed is reacting to inflationary politics or pressure to control it. The Fed appears to be pausing, but only after the economic impact of rate hikes is clear.