Equity and bond markets are “finally getting the memo” that the direction of inflation is likely to be downwards from here across developed markets, according to Kristina Hooper, chief global market strategist at Invesco.
Many asset classes have rallied in recent weeks and gilt prices have risen sharply as market participants rush to price in a peak in interest rates following recent decisions from central banks across the US, UK and eurozone to keep rates at the present level, having previously raised them for many consecutive months.
That repricing has come swiftly on the heels of the market rout of late summer, when investors feared inflation would be more persistent than had been expected, and consequently that rates would stay higher for longer.
Hooper’s view is that central banks have been signalling for some time that rates were near a peak, and that more recently economic data indicates that inflation is starting to roll over.
She says: “The eurozone composite purchasing managers’ index (PMI) for October clocked in at 46.5, which is down from 47.2 in September, suggesting the economy weakened further at the start of the fourth quarter after contracting in the third quarter.
"The press release noted that this 'in part reflected a cooling of a post-pandemic surge in spending on travel and recreation'.
"The flash estimate of eurozone inflation for October fell to 2.9 per cent year-over-year from 4.3 per cent in September and 10.6 per cent in October 2022. Core inflation is still estimated to grow at a 4.2 per cent pace, down from September’s core rate of 4.5 per cent and well below its level a year earlier."
Hooper adds: "The US jobs report showed a lower level of job creation at 150,000 for October. In addition, September nonfarm payrolls were revised downward. Labour force participation remained relatively stable, and unemployment rose slightly to 3.9 per cent.
"Most importantly, in my opinion, average hourly earnings fell to 4.1 per cent year-over-year for October from 4.3 per cent in September."
In terms of what this means for investors, she says: “Markets are finally getting the memo that central banks could very likely be done hiking rates.
"The 10-year US Treasury yield eased significantly the week ending November 3, starting with the underwhelming ISM Manufacturing PMI, then the dovish Federal Reserve meeting, and then the tepid jobs report. Other long-bond yields also followed this trend, from 10-year UK gilt yields to 10-year German bond yields.”
What's next?
Hooper says markets will continue to be volatile as uncertainty around the precise direction of monetary policy will persist.
Her view is that with the market pricing in rates having peaked, it is likely that bad economic news will be treated as good news by investors, as it would increase the likelihood of interest rates being cut.
Joost van Leenders, senior investment strategist at Van Lanschot Kempen, says: “The news on inflation continues to be overwhelmingly positive. In the US, headline inflation stayed the same in September, but core inflation declined.
