Weekly View - To pivot…or not?

The CIO’s view of the week ahead.

It was a week that ultimately ended with disappointment. When the Reserve Bank of Australia chose to raise rates by a less than expected 25bps last Monday, the markets wanted to believe that central banks were at last beginning to contemplate a pivot. Hopes were raised further when the JOLTS numbers the same day showed a massive decline in jobs openings in the US, while the UN urged central banks to reconsider monetary tightening because of fears of global recession. But the mood was completely reversed on Friday with the September employment report in the US. While some leading indicators of US labour market conditions have weakened recently, the unemployment rate and participation rate make it still too hot for the Fed to pivot and a 75bps raise can be expected at the next meeting. We will be watching the CPI figures to be published this Thursday.

European leaders are looking to manage their collective energy strategy as Germany stands accused of undermining unity and placing weaker EU countries at a disadvantage with its EUR200bn support package (Italy and Spain's composite PMIs have both fallen in the last month, indicating a deterioration in economic conditions). There was better coordination on the implementation of the EU’s eighth sanctions package against Russia. This came in the week of Vladimir Putin’s 70th birthday which also saw the sabotage of the Crimea bridge. We can expect Russian retaliation in the coming weeks and the renewal of the Ukraine-Russia grain agreement in November must now be at risk. Meanwhile, OPEC+ made it clear that it would not let oil prices fall despite the decline in demand as it decided to cut production by two million barrels. As some countries were not producing their quota level, the real cut is slightly more than 1 million. This decision should support our $95 target for Brent crude at the end of 2022. 

China’s Golden Week travel season was well below last year’s due to covid restrictions and the Caixin China General Services Business Activity Index (headline services PMI) fell markedly. Recent measures taken to improve liquidity for large property developers is a step in the right direction. 

The Twitter saga may end soon, as Elon Musk has agreed to purchase the company at the price agreed initially. Despite a deflating ending, the S&P500 saw a 1.5% gain on the week. The Q3 reporting season begins this week with the big banks: earnings have already been downgraded but we expect companies and markets to lower expectations for next year. We are underweight equities. We wish our American friends a happy Columbus Day. 

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