Both equity and bond markets rallied sharply in November as softer-than-expected inflation data was a pivotal catalyst.
- The Dow Jones Industrial Average continued its climb out of bear market territory, rising 6.04%. The Nasdaq added 4.51%, and the SPX rose 5.59%. The market move was broad-based, led by materials and industrial sectors, with consumer discretionary and energy components lagging.
- Fixed income sectors also had a swift rebound in November as rates continued to fall from their yield “highpoint” in October. The US yield curve continued to invert further as inflation and Fed data points drove longer-duration prices higher. The US ten-year benchmark began the month at a yield level of 4.05% and closed November at 3.61%. Two-year note yields moved less, from 4.49% to 4.31%.
- Investment grade corporate bonds notched their biggest positive swing in total return last month. As equities and risk premium spreads remained well bid, and rates continued to grind lower, corporate bond indices returned over 5% in November. Large primary deals came to market as corporations took the opportunity to issue new debt. Lower-rated investment grade credit saw better returns and long-duration corporate indices surged over 9% for the month. US High yield was positive but lagged the investment grade universe.
- Municipal bonds performed similarly to corporate bonds as lower yields and lack of supply drove muni prices higher. The broad municipal index was up 4.68%, and intermediate benchmarks rose 2.90%. Next month will bring large-scale reinvestment into the municipal sector as December is historically a high maturity month. This may keep tax-free bonds on the “expensive” side as demand has driven prices to 60% of corresponding Treasury prices, broadly speaking.
Markets reacted to the shift in the yield curve over the past six weeks, but it was the CPI data released in November that pushed rates lower and markets higher. Monthly headline data increased less than expected, helping drive the thematic view that inflation has peaked. Total CPI increased 0.4% M/M vs. consensus +0.5% and is up 7.7% Y/Y, a decline of 0.5% from September and below consensus of +7.9% for the month. Less food and energy, core CPI increased 0.3% M/M and +6.3% Y/Y, both below consensus. Interest rates dropped by 25-30 basis points and the S&P rose over 5.5% on November 10th. PPI data later that week echoed the CPI direction.
As expected, the FOMC moved interest rates 75 basis points higher on November 2nd. Markets got a dose of a chairman that was not “more hawkish” than in prior meetings. Subsequent speakers’ views were mixed – they were vigilant on inflation but interested in seeing the recent restrictive policy take hold. On the last day of November, Fed Chair Jerome Powell spoke at the Brookings Institute, signaling a downshift in the pace of interest rate tightening (50 basis points) could happen as early as their next meeting in December. He added that more rate hikes will be needed to tame inflation and said that the ultimate terminal rate may be higher than previously thought. The Federal Reserve has raised the target range for the federal funds rate six consecutive times, the last four being three-quarter point increases. The current Federal funds rate sits at 3.75%-4%, its highest since 2008.
Economic data last month was not completely negative for the US consumer. While subsequent monthly reports did show some weakening signs, the employment report for October was generally strong. Non-farm payroll numbers beat estimates (261k vs 193K), and prior months were revised higher. The US consumer spent robustly last month, a sign of economic strength that complicates the Fed’s goal of taming inflation. October retail sales jumped 1.3% (consensus +1.0%). Ex-autos, retail sales increased 1.3%, beating the consensus of 0.5%. Consumer confidence surveys did show some signs of slipping, and anecdotal reports of layoffs in the tech and financial sectors have been noticeable.
Almost all November midterm elections have concluded with Republicans winning enough seats in the House of Representatives to claim a majority. Democrats will retain the Senate. The midterm outcome of a split congress has allowed some investors to be more comfortable with markets, as future policy sees more rigorous debate. Inflation is still on top of the list for voters.
While the war in Ukraine and the upcoming winter months in that region have investors worried, China’s re-opening became a catalyst for markets last month. China’s back and forth on its “zero Covid policy” has broad implications for supply chains, and global recession. As reports of leaders in China are softening their stance on “zero covid” and vaccinating its population quicker, risk markets saw further reasons for upside.
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