Europe Announced New Plans to Tackle the Energy Crisis
After a bumpy start, stock markets ended October on a more positive footing. Developed market equities registered a healthy 7% return, although emerging market equities fell 3%, with Chinese indices coming under pressure. Bond yields continued to push higher, with global bonds delivering a -1% return.
The US economy showed some signs of softening in October. The manufacturing PMI fell to 49.9, its lowest level since early in the pandemic. Meanwhile, the services survey declined to 46.6, with forward looking indicators notably weak. Headline and core consumer price indexes rose 8.2% and 6.6% YoY respectively, mainly due to strong services prices that are offsetting falls in goods and energy prices. The labor market remains the bright spot. The unemployment rate fell to a new record low of 3.5% with a stable participation rate of 62.3%, while average hourly earnings rose 0.3% MoM. In aggregate, data released in October kept up the pressure on the Fed. A rate hike of 75bps is expected in November followed by a further 50bps in December.
In UK, the composite flash PMI fell to 47.2, while headline inflation climbed to 10.1% YoY in September. Rishi Sunak was appointed as the new prime minister, while new chancellor Jeremy Hunt reversed many of the previous chancellor’s tax cuts and vowed to deliver a much more restrained budget in mid-November. This led UK government bonds to rally by 3% over the month. Sterling also rallied by a similar amount against the dollar.
Europe announced new plans to tackle the energy crisis, including a first version of a price cap and a common purchases system. With storage tanks full and autumn proving unseasonably warm so far, winter gas prices are down by about 60% since the peak in August. The eurozone PMI surveys reached levels that are consistent with recession. October’s flash composite PMI registered a fall to 47.1, with the manufacturing index at 44.2 and services at 48.2. Inflation in the single currency bloc rose to 10.7% YoY, and core inflation at 5% YoY. Despite the still difficult macro outlook, the ECB delivered a 75 basis point rate hike in October.
China’s Caixin September services PMI showed a sizable fall of 5.7 points to 49.3 due to the latest Omicron wave. Real GDP growth rebounded to 3.9% YoY in the third quarter, beating market expectations. The manufacturing sectors have led the recovery, although the service sectors are still suffering from sporadic lockdowns across the country.
