It was a busy week for markets, digesting the US midterm elections, fresh inflation data, company earnings and the near-collapse of the crypto exchange FTX.
In the midterm elections, with a handful of key states yet to declare voting results, the political control of both the House and the Senate remains undecided. It is clear, however, that the ‘red Republican wave’ predicted by many pollsters hasn’t materialised. President Biden seemed relieved and declared “it was a good day”, having avoided the midterm losses seen by his Democratic predecessors Bill Clinton and Barack Obama. The president insisted that he was prepared to work with Republicans, which will be required should they win either chamber of Congress.
The real driver for markets this week came from the US inflation data released on Thursday. Stocks and bond prices surged higher as the US consumer price index reading for October came in at 7.7% year-on-year, markedly lower than the 8% economists forecast. Having been 8.2% in September, the latest figure is the lowest since January.
Coming in below expectations the Federal Reserve will now likely be feeling less pressure to continue raising interest rates at the same pace (0.75%) seen in the previous four meetings. They next meet on the 14th December, the day before the Bank of England also decides interest rates.
Whilst it is certainly positive to see that the tightening of monetary policy is starting to bring down inflation, I would caution that this is only one data point. Between September and October’s figures, it is tempting to draw a line and assume inflation continues to fall at that pace. It doesn’t change the fact we are heading into an economic slowdown, but it does hopefully give the central banks around the globe the indication that interest rates may not be required to go much higher than current levels.
John Naylor, Chartered FCSI – Head of Investment Committee