Bonds record best monthly gain since 1985

Bas Kooijman

U.S. stock and bond markets rallied, with major indexes like the S&P 500 and Nasdaq Composite posting significant gains, achieving their best monthly performance since July 2020. This surge was supported by declining Treasury yields, leading to the bond market recording its best monthly gain since 1985. Positive news on inflation emerged when the core personal consumption expenditures (PCE) price index indicated a slowdown in October, reducing its year-over-year increase to 3.5%. Federal Reserve Board Member Christopher Waller’s comments, expressing confidence in policy positioning to slow the economy and reduce inflation, also buoyed investor sentiment.

Fed Chair Jerome Powell acknowledged that interest rates had entered restrictive territory, yet he remained open to future rate hikes. Economic indicators showed mixed signals, with personal spending slowing, housing starts falling short of expectations, but jobless claims decreasing. The Fed’s Beige Book revealed a balanced view of economic activity, with half of the districts reporting growth and the other half contraction.

In Europe, the STOXX Europe 600 Index rose by 1.35%, lifted by declining inflation rates and falling bond yields. Major stock indexes across Germany, Italy, France, and the UK also experienced gains. Government bond yields in Europe generally decreased as inflation data fueled speculation that the European Central Bank (ECB) might commence rate cuts next year. However, ECB President Christine Lagarde and other policymakers emphasized the necessity of maintaining higher rates to control inflation.

In Germany, the jobless rate increased and retail sales grew more than expected, indicating fluctuating economic conditions. The UK’s GDP showed no growth in the third quarter, while Bank of England Governor Andrew Bailey dismissed the possibility of rate cuts in the near future. In contrast to the broader trend, UK bond yields increased following hawkish comments from policymakers.

Japanese markets saw a decline, with the Nikkei 225 and TOPIX Indexes falling slightly amid profit-taking after a strong November. The yen strengthened against the U.S. dollar, and the yield on the 10-year Japanese government bond fell. The Bank of Japan (BoJ) board members suggested maintaining the current dovish monetary policy, with no immediate shift in sight. The government approved a budget for a stimulus package to address inflation and boost growth.

In China, equity markets retreated as economic data painted a mixed picture. The manufacturing PMI indicated a contraction, while the Caixin/S&P Global survey showed some improvement. The People’s Bank of China emphasized a shift in lending focus towards efficiency and structure. Industrial profits growth slowed, heightening concerns about China’s economic recovery, especially in the property sector, where new home sales continued to fall.

In summary, the U.S. markets experienced a significant rally due to easing inflation concerns, while European markets saw gains amidst mixed economic signals and ongoing rate discussions, and in Asia, Japan and China faced contrasting market movements influenced by policy stances and varying economic indicators, reflecting the diverse and evolving global economic landscape.

Bas Kooijman is CEO and Asset Manager of DHF Capital SA.