Markets show signs of optimism, but all eyes are on central banks.

Despite a mixed third-quarter earnings season and stubbornly high inflation, October results saw a comeback in most global sharemarkets. All eyes are now on central banks, as price pressures start showing signs of cooling. Read on to learn more.

A good month for most markets

2022 is quickly winding down, and it’s safe to say it has been an intense year for the investment markets. The headline news largely revolved around inflation, but according to economists, October provided some reprieve and sound returns over the month.

In their latest Market Commentary, AMP reported that the US sharemarket gained 8.1% in October, European markets were up 6.2%, and Australia and New Zealand saw increases of 6.0% and 2.5% respectively. But while most markets experienced a good month, emerging markets continued to struggle and the Chinese sharemarket was down 9.6% for the month, with the strict zero-Covid policy dampening consumer confidence and the economy at large.

Is the fight against inflation at a crossroads?

Over the past quarter, central banks across the world continued to try and tackle inflation with aggressive interest rate hikes, including our Reserve Bank. This has left many investors concerned about the extent of the impact on the economy, and the far-from-unlikely possibility that monetary policies may tip the global economy into a recession.

But more recently, there have been signs of economic cooling, supply chain pressures are easing, and the oil price is stabilising. As Kiwi Wealth highlighted in their Market Commentary for October 2022, markets seem to have shifted expectations regarding the trajectory of interest rate hikes. And in this respect, the US Consumer Price Index released in early November was promising.

At 7.7% in the year through October, the US inflation index was rosier than the 7.9% that analysts had forecast and down from 8.2% in the year through September – welcome news for the Federal Reserve, for American consumers, and of course for global markets. However, Federal Reserve officials said that it’s too early to celebrate, noting that more rate increases are likely to come, albeit at a slower pace. “Just like October, inflation will remain the primary investor narrative in November and likely till year-end,” Kiwi Wealth’s report concluded.

A closer look at the New Zealand market

Here in New Zealand, we’ll have to wait until 25 January 2023 for the next inflation index update. The latest data (September 2022) saw yearly inflation at 7.2% – higher than expected and down only slightly from the 7.3% reported in the second quarter.

This prompted the Reserve Bank of New Zealand to increase the official cash rate (OCR) by another 0.5% in October to 3.5%, the fifth consecutive 50 point basis hike since February 2022. And there are some predictions that the RBNZ may now front-foot inflation with an even more aggressive rate hike later this month. It remains to be seen how things will evolve in the coming weeks.

Mixed quarterly corporate earnings

It was a mixed Q3 earnings season. On the one hand, bank shares performed relatively well. On the other, the subdued earnings delivered by large tech firms seem to point to a slowdown in the global economy.

These include the likes of Microsoft, Facebook’s parent company Meta, Amazon and Google’s parent company Alphabet. Interestingly, Alphabet reported its weakest quarterly growth in nearly ten years, and Microsoft saw its slowest quarterly revenue growth in five years.

On the upside, 73% of the reporting companies in the S&P500 (the benchmark index for the US economy) experienced earnings above analysts’ expectations, compared to the long-term average of 66%. This goes to show that many companies are still managing through challenging conditions, though some have downgraded their growth expectations.

What happened in the rest of the world?

It’s been another eventful quarter overseas, marked by growing tensions around the Ukraine war, the UK’s shortest-ever Prime Minister tenure, and the start of a precedent-breaking third term for China’s president Xi Jinping. But let’s proceed with order.

  • Europe & Russia: A quiet confidence is emerging amid the gloom of the European energy crisis. A warmer-than-usual autumn has given EU countries extra time to ramp up their winter gas supply, but according to The Economist, it’s premature to declare an end to the crisis. Faced with military setbacks, Putin may increase the pressure further by stopping all gas deliveries or vandalising infrastructure.
  • The UK: Following Liz Truss’s resignation after just 45 days on the job, the new UK Prime Minister Rishi Sunak is looking to calm investment markets. Truss had come under pressure when her Government’s announced tax cuts prompted a sell-off in UK bonds and caused the British pound to fall significantly. Meanwhile, driven by rising food costs, UK inflation was recently back up to a 40-year high at 10.1%.
  • The US: The mid-term elections were on this month, and things didn’t go as many had predicted. The shift in the balance of power in Congress between Democrats and Republicans – which could have a deep impact on the economy – didn’t happen. For the foreseeable future, market swings will likely be determined by the next interest rate movements.
  • China: After the National Party Congress, the Chinese economy remains in a tough spot. There seems to be no end in sight for the country’s strict zero-Covid policy, and investors fear that with the new leadership team, China will isolate itself even further from the rest of the world.

Where to from here?

With so many different factors at work, it’s nearly impossible to predict the direction of the markets. All the economists and analysts that we have looked at agree that the ongoing challenges we’ve seen all year will likely persist. So, markets are expected to be unsettled for the foreseeable future.

That said, as AMP economists put it, “October has demonstrated that not all volatility is bad, and it goes both ways. Market ups and downs are a natural, and an inevitable part of investing. This is why it’s important to remain with your investment and savings strategy, and to focus on the big picture, so you don’t miss out on the market rebounds like we saw in October.”

In the meantime, here are some key local factors to watch, according to ANZ:

  • Wage growth momentum – If the wage-price spiral keeps surprising, the RBNZ may need to increase the OCR beyond 5%.
  • Net visitor arrivals – Migration flows are expected to recover, but they have a long way to go before returning to normal.
  • Labour market – To overcome the ‘sticky’ domestic inflation, it’s crucial that the unemployment rate increases from the current 3.3%.
  • House prices – To date, national house prices have fallen between 12% and 8%, depending on the analysis. How low they might go is anyone’s guess.   

Sources and further reading:

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.