Eastspring Investments
5 min read
Summary
The upcoming US presidential election poses a risk to the market, with higher volatility expected in the near term.
Market update
Equities: The Fed's 50 basis point (bp) interest rate cut, along with China's significant stimulus package lifted investor sentiment in September. US equities returned 2.2% and Developed Markets rose by 1.9%. Emerging Markets, led by China, rose 6.7%. China equities rallied 23.9%, fueled by the country’s stimulus measures, the Fed’s rate cut, and a depreciating USD. Asia Pacific ex Japan markets rose 7.9%. Japan equities bucked the trend and fell 0.4%, due to weak domestic spending and a strengthening yen. Korea equities also fell 2.9%, weighed down by the decline in Samsung Electronics’ share price and foreign investor selling amid ongoing concerns over the AI bubble.
Fixed Income: US Treasury yields generally declined across key tenors to close the month. The US Treasury 10-year yield fell approximately 10 bp to 3.81%, while the 2-year yield decreased by roughly 25 bp to 3.66%. Global bond markets saw modest gains as the global aggregate bonds delivered a 1.7% return and U.S. aggregate bonds rose by 1.3%. Increased expectations of a US “soft landing” supported US investment grade and US high yield credits, with returns of 1.7% and 1.6%, respectively. Emerging market debt returned 1.8% in USD terms, buoyed by a weaker US dollar.
Macro overview
Growth: The J.P. Morgan Global Composite PMI Output Index has remained above a “50” reading for 11 consecutive months, signaling still positive global economic expansion. However, momentum is slowing amid continued weakness in the manufacturing sector, which decelerated for the third consecutive month. Recent US data has been surprisingly strong, highlighted by robust September job gains and the U.S. Bureau of Economic Analysis’ (BEA) upward revisions to personal income and personal savings data. However, economic data across other key regions (e.g., Europe, Japan, EM) remain below expectations. Despite resilient US data, the possibility of a US recession in the next 6-12 months cannot be ruled out, although a severe contraction is unlikely.
Inflation: In September, the headline US Consumer Price Index (CPI) rose by 2.4% y/y compared to the same period last year, down from a 2.5% y/y rise in August. While core CPI remains relatively persistent, we maintain our view that inflation progress is moving towards the Fed's 2% target, although the path will be uneven. We are closely monitoring the labour market situation and the trajectory of wage growth to detect any significant shifts in the disinflationary trend or signs of a potential reacceleration in inflation. Additionally, we are being watchful of any potential supply-side driven inflation risks, especially those that may arise due to geopolitical tensions such as the escalating tensions in the Middle East.
Monetary Policy: As inflation moves closer to the Federal Reserve’s (Fed) 2% target, both the Fed and the markets are expected to focus on the labour market progress in the coming months, as pursuing maximum employment is part of the Fed’s dual mandate. We are cognisant that an easier monetary policy, combined with a still-resilient US economy could potentially result in a resurgence in inflation.
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