The focus areas during the week included:

The S&P 500 ended the week down a further -2.5%, having shed 10.3% of its value since the end of July. It was hurt by mixed corporate earnings reports and concerns about higher interest rates. About 49% of the S&P 500 companies have reported their third-quarter results and around 77% of them have exceeded earnings forecasts. At this stage, US company earnings are forecast to grow by 2.4% y/y in Q3 2023, which would be the first quarter of positive earnings growth after three consecutive quarterly declines.

Interestingly, Microsoft, Google (Alphabet), Facebook (Meta) and Amazon all reported earnings this week. Although most of their financial indicators showed solid growth and exceeded consensus expectations, markets seemed to focus more on indications of rising expenses, raising further questions about their valuations. (The “Magnificent Seven”, namely Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA and Tesla, have been the key driver of US equity returns over the past year.)

The Shanghai Composite Index increased by 1.2%, helped by an improvement in industrial profits which suggested that the Chinese economy may be stabilising. Industrial profits increased by 11.9% y/y in September, the second consecutive monthly increase (in August profits rose by 17.2% y/y). Although profits have fallen by 9% y/y in the first nine months of the year, economic activity appears to have improved in recent months, which should support an ongoing improvement in profitability over the coming months.

The price of  Bitcoin has risen by almost 25% since the middle of October 2023 and is up 104.9% year-to-date.

At the start of the week, the yield on the 10-year Japanese government bond rose to a 10-year high of 0.87%, which is close to the central bank’s upper boundary of 1%. Subsequently, the Bank of Japan (BoJ) conducted an unscheduled bond-purchase operation to curb the rise in sovereign debt yields. This is the fifth unscheduled bond purchase operation since July and it could prompt a further revision to the BoJ’s yield curve control limits.

US GDP grew by an impressive 4.9% q/q in Q3 2023, above expectations for growth of 4.5%. The improvement was driven by consumer spending, increased inventories and government activity, including defence. Interestingly, data and commentary from Visa on the state of the US consumer suggests that the consumer is not cutting back dramatically, despite sustained high interest rates. However, given the moderation in wage growth, resumption of student loan payments and steady depletion of excess savings, the rate of growth in household spending is expected to slow more noticeably in 2024.

The US House of Representatives, the lower chamber of the US Congress, selected Mike Johnson as the new Speaker. Mike Johnson received unanimous support from the Republican Party. Critically, the US government’s current funding resolution will expire on 17 November, which could lead to a government shutdown. This means that Johnson’s political support will be tested over the coming weeks if he wants to get the government’s budget approved without needing support from the Democrats – which is what cost Kevin McCarthy his role as the Speaker. Since 1977, when 1 October became the start of the federal government’s fiscal year, there have been 14 government shutdowns. In the 30 days leading up to a US government shutdown, the S&P 500 recorded a negative outcome only half of the time, and in the 30 days after the shutdown, the equity market declined around 60% of the time. In other words, there is no clear pattern when it comes to the impact of a federal government shutdown on US equity market returns, leading to the conclusion that it has no discernible impact.

US Personal Consumption Expenditure (PCE) inflation was recorded unchanged at 3.4% in September, in line with expectations, while core PCE inflation was 3.7% – also in line with market expectations. Encouragingly, core PCE inflation slowed slightly from August’s reading of 3.8%. Although the latest PCE inflation outcome remains well above the Fed’s 2% target, it is expected to leave rates unchanged at its next policy meeting on 31 October/1 November. Critically, core PCE inflation is expected to continue to moderate over the coming months, especially if shelter inflation starts to moderate more meaningfully.

The European Central Bank (ECB) left its policy interest rates unchanged at 4.5%, a 22-year high, at its October meeting. This was in line with expectations. The ECB reiterated that if it maintains the current level of interest rates for long enough, inflation should eventually moderate to the target of 2%. The Governing Council said previous tightening of monetary policy was already spreading “forcefully into financing conditions” and was “increasingly dampening demand.” ECB President Christine Lagarde said at the press conference following the decision that the euro area economy was “weak” and would remain so “for the remainder of this year.” We expect euro area inflation to reach the ECB’s target of 2% in the final quarter of 2024, allowing it to start cutting rates in the second half of 2024. On an annual basis, euro area inflation is expected to average 5.4% in 2023, slowing to 2.5% in 2024.

The euro area HCOB Composite Purchasing Managers’ Index (PMI), which includes both the manufacturing and services sectors, fell more than expected in October to 46.5, down from 47.2 in September. This latest reading is a 35-month low and the fifth consecutive month that the PMI has been below the 50-index level.

SA’s headline producer inflation continued to accelerate in September, hurt by a spike in fuel prices. However, PPI inflation remains within the SARB’s target range, at 5.1% y/y.

SA’s composite leading business cycle indicator rose by 0.4% in August, its third consecutive monthly increase – off a low base. On an annual basis, the rate of decline decelerated, coming in at -5.3% y/y compared with -7.7% in July. Despite the recent monthly improvement, the leading indicator has declined year-on-year for the past 17 consecutive months, reflecting the stagnation of the economy.

SA’s National Treasury announced that the introduction of the two-pot retirement system will be delayed by a year to 1 March 2025. The delay is to allow the retirement industry to implement key administrative changes. However, National Treasury announced that the amount that can be accessed immediately when the system is implemented has been increased from R25 000 to R30 000. There is a significant risk that a large number of individuals will eliminate their retirement savings to supplement ongoing consumption expenditure.

The government of China authorised the issuance of RMB 1 trillion ($137 billion) in additional sovereign debt for disaster relief and construction. It also approved a plan to raise the fiscal deficit ratio for 2023 to about 3.8% of GDP, up from the 3% limit set in March. This is part of a range of measures introduced by the Standing Committee of the National People’s Congress to support the economy, which has been hurt by the persistent housing market crisis. Country Garden Holdings, previously China’s largest property developer, defaulted on its offshore debt payments for the first time, being unable to meet interest payments at the end of a 30-day grace period.

Japan’s inflation rate rose to 3.3% in October, up from 2.8% in September, while the core inflation rate accelerated to 2.7% in October. This was above consensus and the first increase in four months.

Japan’s Prime Minister, Fumio Kishida, unveiled measures to cut taxes by JPY 5 trillion ($33 billion). This could include a tax reduction of JPY 40 000 (R5 000) per person next June and a transfer of JPY 70 000 (R8 800) each to low-income households by the end of 2023.