Global Market Themes

November was a strong month as the majority of markets posted gains, thanks to a variety of positive developments. This was primarily a function of lower-than-expected US CPI inflation data and remarks by Federal Reserve Chairman Jerome Powell indicating that the bank may start slowing its pace of short-term interest rate increases after its December meeting. Investor speculation that China would partially unwind its current “Dynamic zero-Covid” policy was also a contributing factor. Both developed and emerging market equities performed strongly, the latter group benefitting the most from the changing market narratives. The MSCI EM Index returned 14.8% and the MSCI World Index gained 7.0%.

The softening seen in annual US CPI inflation data bolstered global bond performance, with aggregate indices such as the Barclays Bloomberg Global Bond Index rising by 4.7% or more. Government bond yields in the US and across the European Union fell over the month. Increased risk appetite returned to bonds too, with the JP Morgan EM Bond Index gaining 6.6% as the US Dollar weakened in November. In aggregate, commodities posted losses in November, with the S&P Goldman Sachs Commodities Index closing 1.7% lower. This was mainly due to falling energy prices, likely a reflection of slowing global economic growth. Industrial metals and agricultural commodities also showed falling prices over the month.

Inflation, US CPI in particular, remains the dominant market theme in 2022.

November data released in the middle of the month surprised by coming in at 7.7% relative to the consensus figure of 8.0%. A 0.3% difference may not seem like much, but markets appear to have read this as the peak in annual US CPI, and that this metric will most likely continue trending lower in coming months.

This in turn implies that the US central bank is now likely closer to the end of its interest rate hiking cycle, which means that both inflation and short-term interest rates moving forward pose less uncertainty for markets broadly. This CPI print and the US central bank chairman’s comments (providing guidance that the pace of rate hikes is likely to slow to 50 basis points per meeting from the December meeting onwards) were clear catalysts for higher asset prices in November.

As of the end of November, fixed income markets are expecting the Federal Funds Rate to peak at 5% by May 2023, implying another 1% – 1.25% of rate increases between December and May.

Economic data out of the US continues to indicate a slowdown. Manufacturing Purchasing Managers’ Index (PMI) data (survey data which proxies the domestic business cycle) fell into contractionary territory this month, printing at 47.6 versus 50.6 the previous month – the 50-index level is the line between economic expansion and contraction. Persistent inflation and an uncertain short- to medium-term outlook were the prevailing factors cited as the causes of falling output and declines in new orders – subcomponents of the PMI data.

On the employment front, monthly non-farm payroll data showed a better-than-expected gain of 263 000 new jobs. While monthly job growth has trended down over the year, from the 500 000 level in January, the US economy remains strong from a labour market perspective. This is important as it’s a primary input into monetary policy. The Federal Reserve is concerned that a consistently strong labour market may lead to rising wage inflation, which in turn feeds into and sustains higher levels of overall CPI inflation over time.