US markets: US markets were lower, with the Dow Jones down -3.5% and S&P500 down -4.9%, as evidence of a resilient labour market reinforced the case for the Fed to keep rates elevated.
Long-dated US treasury yields were higher, with the 2-Yr yield at 5.04% and 10-Yr yield at 4.57%, with the Fed Bank of NY’s gauge of the 10-year term premium, a key measure of how much bond investors are compensated for holding long-term debt, turning positive for the first time since June 2021, on expectations the Fed will hold interest rates high and the supply of new bonds will keep rising as the federal government contends with mounting deficits.
European markets: European markets were mostly lower with the Stoxx Europe 600 Index down -1.7%, UK FTSE up +2.3% and German DAX down -3.5%.
Asian markets: Asian markets were lower, with the Nikkei down -2.3%, KOSPI down -3.6%, and the Shanghai Composite declining -0.3%.
Commodities: Over the month, WTI oil price gained +9.4% to US$90.79/bbl, as OPEC forecast oil markets to experience a shortfall of 3.3m barrels a day in 4Q23, the most constrained market in more than a decade, and EIA upgraded 2023 world oil demand growth outlook by 50k bpd to 1.81m bpd y/y increase while downgrading 2024 outlook by 250k bpd to 1.36m bpd y/y increase.
ASX performance: The ASX200 declined -3.5%.
In political news:
U.S.-China tensions escalated with China announcing plans to expand a ban on the use of iPhones in sensitive departments to government-backed agencies and state companies and the U.S. raising munitions and equipment aid for Taiwan to $480m leading to China sanctioning Northrop Grumman Corp and a subsidiary of Lockheed Martin Corp for supplying arms to Taiwan.
In economic news:
Australian RBA decision: RBA left the cash rate unchanged at 4.1% in both September and October policy meeting, however, retained a tightening bias with members reiterating further tightening may be needed if prices remain sticky, while acknowledging higher borrowing costs are already beginning to align demand with supply.
Global growth outlook: OECD warned the world economy is set for a slowdown as interest-rate increases weigh on activity and China’s pandemic rebound disappoints, as it upgraded world 2023 growth outlook by +30bps to +3% (U.S. up +60bps to +2.2%, euro area down -30bps to +0.6%, U.K. unchanged at +0.3%, Japan up +50bps to +1.8% and China down -30bps to +5.1%).
The 2024 forecast was downgraded by -20bps to +2.7% (U.S. up +30bps to +1.3%, euro area down -40bps to +1.1%, U.K. down -20bps +0.8%, Japan down -10bps to +1% and China down -50bps to +4.6%).
Global debt climbed by $10 trillion in 1H23 to a record $307 trillion with debt as a share of GDP climbing +200bps over FY22 to 336%.
U.S: The US Fed left benchmark interest rate unchanged while signalling borrowing costs will stay higher for longer after one more 25bps hike this year before 50bps rate cut in 2024 vs market expectation of 100bps, as it upgraded 2023 and 2024 GDP growth forecast by +110bps and +40bps to +2.1% and +1.5%, respectively, while maintaining 2025 and 2026 growth expectations of +1.8%, and downgraded 2023 core inflation expectations by -20bps to 3.7% while maintaining 2024 and 2026 outlook of 2.6% and 2%, respectively and upgrading 2025 expectations by +10bps to 2.3%.
Consumer confidence slumped to a four-month low in September, dampened by a deteriorating outlook for the economy and labor market, however, near-term inflation expectations fell to the lowest level since early 2021 in September with 1-year ahead outlook declining -30bps to 3.2% and 5-to-10-year expectations staying steady at 2.8%, the lowest in a year. Factory activity contracted in September by the least in nearly a year, bolstered by strongest production growth since July 2022 as well as an expansion in factory employment.
China: Factories stabilized in September with the official gauge of manufacturing activity returning to expansion in for the first time in 6-months.
Australia: Economy maintained its momentum in 2Q23, with GDP expanding +2.1% y/y (+0.4% q/q), underpinned by exports. Business conditions showed ongoing resilience to higher interest rates and elevated price pressures, while consumer confidence fell further into “deeply pessimistic” territory in September. Australia recorded its first budget surplus since the eve of the 2008 GFC, with underlying cash surplus of A$22.1bn in the 12-months through June, equating to 0.9% of GDP, as an ultra-tight labor market and elevated commodity prices swelled the nation’s fiscal coffers.
Europe: ECB raised interest rates by +25bps to 4.5%, however, President Christine Lagarde signalled a shift in gear that could mean the peak has been reached, as the bank downgraded euro-area 2023 GDP outlook by -20bps to +0.7%, 2024 by -50bps to +1% and 2025 by -10bps to 1.5% while also downgrading core-CPI forecast for 2024 and 2025 by -10bps to 2.9% and 2.2%, respectively.
European Commission cut euro-area 2023 and 2024 GDP growth estimates by – 30bps to +0.8% and +1.3%, respectively while downgrading 2023 inflation forecast by -20bps to 5.6% and upgrading 2024 inflation outlook by +10bps to 2.9%. Euro-area 2Q23 GDP was revised -20bps lower to +0.1% q/q amid a dismal performance for exports.
Euro-area economic confidence slowed for a fifth month in September, driven by the sub-indicator for consumers which dropped markedly, while services inched lower, and industry improved. Euro-area CPI moderated to an almost 2-year low of +4.3% y/y in September with core inflation easing to its slowest pace in a year.
U.K: BOE halted for now the most aggressive cycle of interest-rate rises in more than three decades, as concerns about inflation gave way to signs the economy is slipping into a recession with the bank downgrading 3Q23 GDP growth forecast by -30bps to +0.1% while warning underlying growth in 2H23 is also likely to be weaker than the 0.25% expected in August.
Labor market showed signs of cooling in 2Q23 as unemployment rate rose +10bps to 4.3%, the highest level since 2021 and the number in work declined, however, average earnings excluding bonuses rose +7.8% y/y, maintaining the fastest pace since the series began in 2001, with total wage growth overtaking inflation for the first time since March 2022. PMI slipped deeper into contraction territory in September with companies now shedding staff at the quickest pace since the pandemic and the GFC.
India: Unemployment rate dropped -101bps MoM to a one-year low of 7.09% in September, as joblessness in rural areas fell -91bps MoM to 6.2% and urban unemployment rate fell -115bps MoM to 8.94%. Manufacturing activity remained relatively strong in September, outperforming other Asian economies, as both demand and output saw significant upticks and businesses picked up new clients in key overseas markets.
Japan: BOJ kept its negative interest rate and the parameters of its yield curve control program intact with both BOJ Governor Kazuo Ueda and his deputy doubling down on the central bank’s message that stimulus is still needed, stressing that the economic recovery remains too fragile for a tightening of policy while warning it’s too soon for financial markets to speculate on a near-term rate hike.
Economy expanded at a slower pace than initially estimated in 2Q23, with GDP revised down to an annualized +4.8% q/q, as businesses cut back investment in plants and equipment and consumers spent less. Confidence among Japan’s large manufacturers picked up more than expected, while sentiment for non-manufacturers soared to the highest in 32-years in 3Q23, as the economy continued to recover from the pandemic.
Germany: Bundesbank forecast Germany’s economy to shrink in 3Q23 as consumers are hesitant to spend meanwhile, manufacturing weakness is intensifying, and higher financing costs are worsening strains on domestic and foreign demand. Inflation plunged to its lowest level in two years in September with CPI advancing +4.3% y/y.
Business outlook improved slightly in September, while remaining at historically low levels as the economy faces another contraction in 3Q23. Labour market weakened with a gauge measuring firms’ willingness to take on employees falling to its lowest level since February 2021 in September.
On stock specific news:
Block Inc (SQ2) – declined -23.0%, after announcing Square CEO Alyssa Henry will depart, effective October 2, after nine years at the company.
Costa Group Holdings Ltd (CGC) – gained +9.8%, after entering into a scheme implementation agreement with a consortium led by Paine Schwartz Partners for the acquisition of all the shares the consortium does not already own at A$3.20/share cash.
Imugene Ltd (IMU) – declined -32.4%, after completing a dilutive capital raise.
Pro Medicus Ltd (PME) – gained +13.7%, after signing a 10-year A$140m deal with Baylor Scott & White.
Star Entertainment Group Ltd (SGR) – declined -34.0%, after completing an institutional placement and non-renounceable entitlement offer at A$0.60/share.
This Monthly Market Wrap snippet was provided courtesy of BanyanTree Investment Group.
Banyantree gives clients the confidence to invest, by offering institutional quality investment research and investment management.
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