Week ending 21st October 2022.

Inflation and interest rate expectations remained front-and-centre of the market’s focus this week following comments from a number of Fed policymakers that while further monetary tightening was needed, going forward interest rate increases may be in smaller increments to reduce the risk of overtightening – and as you can see from the accompanying table, the market reaction was very positive.

It was a similar story in the UK as Ben Broadbent, the BoE’s Deputy Governor this week confirmed what we have been arguing in these commentaries:  market expectations for UK interest rates are far too high.  And this suggests that bond yields will come down – which should help to lower the rates on new fixed-rate mortgages.

Equity market sentiment this week was also helped by better-than-expected company earnings statements.  For example, in the US, in addition to the banks where earnings have been helped by higher interest income and a resilient consumer, Netflix ended the week up 25.9% after reporting Q3 results and subscriber growth; while the Lockheed Martin, the aerospace & defence company (famous for the F-35 fighter jet and Javelin anti-tank missiles), rose 16.74% following Q3 earnings which were accompanied by a higher dividend and share buy-back program.

In fact, of the 99 companies in the S&P 500 that have so far reported, 71 have beaten analyst expectations, and in aggregate earnings are 4.50% higher than expectations.  Unsurprisingly, the data has been dragged down by the 14 consumer discretionary companies that have reported – i.e. companies providing non-essential goods and services such as Carnival Cruises (holidays) and Nike (sportswear).  US households are facing exactly the same issues to us in the UK, with budgets squeezed by higher food and energy bills and wage growth that lags inflation.

Elsewhere, the Japanese government this afternoon (Friday 21 October) intervened in the currency markets for the second time this month to support the yen – as we have previously explained (please see here), the US dollar has strengthened against all currencies this year thanks to geopolitical uncertainties and the US monetary policy, but the yen has depreciated more than most currencies due to its low interest rate policies.  To put this in context, even after today’s massive intervention, the yen has still depreciated just shy of 22% against the US dollar since the start of the year, versus the pound’s 16.8% depreciation.

In the UK, the political musical chairs continued – and while mind-blowing, the best outcome for some semblance of continuality and calm, would be for whoever moves into number 10 Downing Street at the end of the week, they leave Jeremy Hunt resident at number 11 Downing Street.

However, the market’s main focus for this coming week will be on the central bank policy meetings in the Eurozone and Japan.

Elsewhere, we have US mortgage and housing data; US Q3 GDP; US, UK, Eurozone & Japanese PMI; and US durable goods

Investment Management Team