The focus areas during the week included:

The aftermath/consequences of Hamas’ attack on Israel continues to dominate headlines. The path of the conflict remains uncertain, with concerns mounting around the potential for it to spill into other countries in the region. In particular, the risk of escalation or broadening of the military conflict in the Middle East poses an upside risk to the oil price. In that regard, it is worth highlighting that the oil price (Brent) rose sharply on Friday to over $90/bl (on Thursday the US further tightened sanctions against Russian crude exports). While the human element of the conflict should not be dismissed or underestimated, the broader implication for financial markets could be relatively temporary based on historical events (see discussion below).

The S&P 500 Index gained a modest 0.4% in the week as investors balanced the worse than expected inflation data on Thursday against dovish signals from key Federal Reserve (Fed) officials earlier in the week. In addition, the major banks kicked off the unofficial start to the third-quarter earnings reporting season on a positive note, as their profits got a boost from higher interest rates.

US bond yields finished the week slightly lower, as markets struggled to digest the combination of dovish commentary from some Fed officials, higher than expected US PPI and CPI, as well as the increased geopolitical uncertainty related to the conflict in Israel/Gaza. The US 10-year bond has been especially volatile over the past month, with the yield rising from around 4.2% in September to 4.8% earlier this month and finishing the past week around 4.63%. Much of the increase in yields was driven by messaging from the Fed that it could be forced to keep policy rates higher for longer to drive inflation sustainably lower. More recently, yields have declined amid rising geopolitical concerns (increase in demand for safe-haven assets) and commentary from Fed officials who suggested that the recent spike in bond yields could reduce the need for additional policy rate hikes.

History suggests that geopolitical risks and the associated confidence shocks tend to be short-lived, as markets gravitate toward more sustainable drivers of returns. The chart attached looked at 10 prominent historical episodes of military conflicts/attacks, and shows that the knee-jerk reaction is for US equities to decline the day of the event and performance to be mixed over the following month, as investors have a natural aversion to uncertainty. But the impact on returns usually proves temporary, as equities were higher in most cases six months and one year later.

The STOXX Europe 600 Index gained almost 1% in the week, partially reversing the prior three weeks’ losses. The European equity market was helped by the dovish comments from Fed policymakers. In contrast, financial markets in China declined in the first full week of trading after the Golden Week holiday, as softer inflation and trade data renewed concerns that the economy may slip back into deflation.

Year-to-date the rand has lost -10.4% of its value against the US dollar while emerging market currencies in aggregate are down -4.3%. The rand retraced some of its losses this week as the probability of US rates remaining unchanged in November increased, leading to some risk on sentiment. However, with US inflation increasing more than expected on Thursday, there is a little more anxiety around the path of US interest rates.

US headline consumer inflation rose by 3.7% y/y in September, unchanged from the prior month and slightly ahead of expectations for a moderation to 3.6%. On a seasonally-adjusted basis, headline inflation rose by 0.4% m/m, with most of the increase attributed to prices for shelter and gasoline. Core CPI increased by 4.1% y/y, down from 4.3% in the prior month and in line with market expectations. Shelter inflation rose by 0.6% in the month and 7.2% y/y, accounting for over 70% of the total increase in core CPI. Fortunately, leading indicators of shelter inflation continue to trend lower. This week’s inflation report is unlikely to materially change the outlook for the next Fed meeting on 1 November, which is for rates to remain unchanged.

US core PPI inflation rose by 0.3% in September, a little above market expectations for an increase of 0.2%. This pushed the annual rate of core PPI up to 2.7% compared to expectations for a rise to 2.3%, its highest level since May 2023. Importantly, the previous month’s increase was revised significantly higher from 2.2% to 2.5%.

US Fed vice chair Philip Jefferson told an economics conference in Dallas that he was mindful that the rise in long-term bond yields might affect the need for future rate hikes. He also acknowledged that policymakers “have to balance the risk of not having tightened enough against the risk of policy being too restrictive”. Dallas Fed president Lorie Logan, widely considered one of the central bank’s most hawkish policymakers, also surprised the market by suggesting that “there may be less need to raise the fed funds rate” because of the higher yields, although she repeated her insistence that rates would need to remain elevated.

According to the minutes from the Fed’s September policy meeting, while “all agreed that rates should stay restrictive for some time”, officials also agreed that the “Fed should shift communications from how high to raise rates to how long to hold rates”. By the end of the week, federal funds futures were pricing in only a 5.7% chance of a rate hike at the next Fed meeting in November versus 27.1% the previous week.

The US NFIB Small Business Optimism Index fell 0.5 index points to 90.8, below market expectations for the index to ease to 91.0 from 91.3 in August 2023. Small businesses are especially pessimistic about future business conditions, hurt by concerns about high inflation, elevated interest rates, tightened access to credit, and a shortage of qualified workers.

The minutes of the European Central Bank’s (ECB) September meeting revealed that “a solid majority” of policymakers voted to raise the key deposit rate to a record high of 4.0%. The decision appeared to be a close call, given the “considerable uncertainty”. Pausing the rate increases “risked being interpreted as a weakening of the ECB’s determination, especially at a time when headline and core inflation was still above 5%”.

South African mining production continued to fall in August, decreasing by -2.5% y/y, driven by lower diamond and manganese ore production amid base effects. In contrast, iron ore, PGMs and gold production rose.

China’s trade surplus rose to $77.71 billion in September as exports rose at a much faster pace than imports. On a yearly basis, exports surprised on the upside while imports were disappointing, suggesting ongoing weakness in domestic economic conditions.

Chinese consumer inflation slipped back into being on the verge of deflation in September, coming in at 0.0% y/y, as goods demand remained muted. Inflation was below the People’s Bank of China’s implicit target for 41 months. Core inflation remained subdued at 0.8% y/y.

The IMF released its World Economic Outlook, which forecast that global growth would slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024. These projections remain below the historical (2000–19) average of 3.8%, and the forecast for 2024 is down by 0.1 percentage point from the estimate presented in July 2023. In advanced economies, the expected economic slowdown is sizeable from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024. This is despite stronger than expected US growth, which highlights the more pronounced moderation in euro-area growth. In contrast, growth in emerging market and developing economies is projected to slow much more modestly, falling from 4.1% in 2022 to 4.0% in both 2023 and 2024, with a downward revision of 0.1 percentage point in 2024 that largely reflects the property sector crisis in China.