The Month Ahead

Investment markets were mostly weaker in October, led by further declines in bond prices. Equity markets were also generally weaker, as companies struggled with higher borrowing costs and uncertainty around the Israel-Palestine conflict remained. The weakest areas were Europe and Asia, where some indices were down as much as 3%, as of 26 October, while US markets were better performing, but were still on track to end the month lower. 

Bond markets remain the bellwether for overall market sentiment as bond yields continue to rise. During October, the yield on the US 10-year government bond topped 5% for the first time in 16 years, while it was a similar story in Europe and Australasia, with many government bond yields at their highest level since before the Global Financial Crisis. 

The rise in yields has been driven by several factors, which will remain in focus during November. Firstly, volatile oil prices on the back of geopolitical unrest in the Middle East are raising the possibility of a spike in inflation (although the initial move has seen a sell-off in oil prices), while increasing new bond issues has also put pressure on bond markets. 

The rising issuance of bonds in the US has come on the back of lower-than-expected government tax revenue, which means the Treasury must raise more money to cover its spending obligations, while the refinancing of current debt (in the US, the federal debt surpassed US$33 trillion) is also putting pressure on bond prices.

It’s a busy month for policymakers with the Reserve Bank of New Zealand (RBNZ), US Federal Reserve (the Fed) and the Reserve Bank of Australia (RBA) all meeting. 

It is expected that the RBNZ will leave interest rates unchanged with recent inflation data coming in slightly lower than expected, while the Fed is also expected to leave interest rates unchanged. However, comments from Fed Chair Jerome Powell in October suggested that its tightening cycle may not be over. 

“Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy”, Powell said at a speech in October.  

Meanwhile, in Australia, after some stronger-than-expected inflation data, the RBA is poised to resume its interest rate hiking cycle when it meets on 7 November. The RBA has held its key policy rate steady at 4.10% since its June hike, but with further pricing pressures, interest rate markets, as of 26 October, are pricing in about a 75% chance of a move to 4.35%.

After a stopgap deal was reached in September to avoid a government shutdown, Congress has until mid-November to ratify a funding deal for the full year to keep the government open. The window for talks was cut short by more than three weeks because the House was operating without a speaker (Kevin McCarthy was ousted early in October and replaced by Mike Johnson on 25 October). 

With talks now underway, key areas include funding for Israel and Ukraine. New Speaker Johnson had previously opposed funding for Ukraine so this could prove to be a sticking point and may push talks right up to the deadline. 

A shutdown could have consequential impacts across the US with many government operations grinding to a halt, excluding services deemed essential to public safety, should a deal not be reached. A shutdown could also have meaningful economic consequences that can weigh on economic growth – especially if they are drawn out. 

We remain underweight to global equities and overweight to domestic and international fixed interest. The rise in bond yields and subsequent increase in issuance is providing investors with the opportunity to own fixed interest assets with yields not seen in many years.