NEI Monthly Market Insights: October 2022

Nov 21, 2022

Is bad news good news?

October saw most global financial assets rebound, following weak performance in the prior two months. The market responded positively to soft economic data such as downward revisions to global growth and weakening manufacturing PMIs, as a sign that tightening policies are effective and central banks could pause on hikes sooner. This led the market to speculate that central banks could begin to pause on rate hikes based on the softer tone from the European Central Bank (ECB) and Bank of Canada (BoC) raising rates by 50 basis points (bps) instead of the 75bps that was expected. Some signs of easing of inflation also supported this. However, there were other areas of strength in the economic data. The U.S labor market continued to show strength with non-farm payroll increasing by 263K in September, exceeding the five-year monthly average while retail sales consumption remained resilient.

The NEI perspective

Central Banks decelerating rate hikes, but may take longer to get to their peak as oversized rate hikes maybe coming to an end. Policy leaders may take a more cautious approach going forward as they analyze how higher rates are impacting different parts of the economy. A slower pace of tightening may result in a longer journey to peak rates.

Economic growth weakens as monetary tightening takes effect based on the recent contraction in the Manufacturing PMI and weaker projections for GDP growth in the year ahead. On the other hand, it appears inflation may finally be moderating according to recent data on input prices, supply chains and food prices.

No patience for earning misses as well-known mega-cap companies like Alphabet, Amazon and Google see significant decline in share price following the release of their Q3 results. Overall, Q3 earnings were strong with 71% of companies beating estimates, however investors expect slower earnings growth in Q4. Most of the S&P earnings growth came from the energy sector and would have been negative if excluded.

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