20 Nov 2023
Monthly Commentary | Oct 23
Markets continued the recent trend of weakness over the month of October, with interest rates continuing their march higher. The US 10-year bond yield breached the 5% mark for the first time since before the GFC as strong economic data over the third quarter suggested the higher short term interest rates had not yet impacted aggregate spending. The tragic events in Israel/Gaza heightened geopolitical uncertainty and global equity markets remained volatile and sold off later in the month to post a third straight monthly decline. The MSCI ACWI Index was down nearly 3% in local currency terms, but with the NZD falling nearly as much the index was slightly positive in NZD (unhedged) terms. The Bloomberg Global Aggregate Index (hedged to NZD) returned -0.75% for the month.
One of the key drivers of higher interest rates over recent months has been the resilience of economic data, and therefore the expectations of the ‘higher rates for longer’ scenario playing out. In the US the 3rd quarter GDP report (+4.9% QoQ annualised) was the strongest print since late 2021 when the economy was rebounding sharply out of the Covid-induced troughs. The US Fed has hiked rates more than 5% and this is expected to eventually slow down business investment and household spending in the world’s largest economy, but this has not yet been the case. European economic growth was much more subdued and the third quarter print there was slightly negative. In positive news for Europe, inflation has fallen back below 3% YoY with the sharp drop in energy prices being the main contributor. This should allow the European Central Bank to pause their rate hiking cycle.
Corporate earnings season kicked off in October with company reports for the third quarter generally exceeding expectations, offering support to equity markets. Earnings growth was especially strong within technology, particularly in the semiconductor and software sectors. The Utilities sector posted the strongest performance over the month. Utilities have been one of the weakest sectors over the last year with their defensive characteristics and high dividend yield underperforming in a rising rate environment.
