October was marked by a series of unexpected developments: increasing trade tensions between the U.S. and China, a hawkish turn from the U.S. Federal Reserve (Fed), headlines about rising credit stress in the U.S. and auto dealer bankruptcies, as well as Takaichi’s surprise election win as the leader of the Liberal Democratic Party (LDP), all of which contributed to a choppy month for markets.

Yet, markets were quick to separate the signals from the noise. Artificial intelligence (AI) continues to underpin the growth narrative, global equity markets rose higher, with the MSCI World Index and the MSCI Emerging Markets Index returning 2.6% and 4.6%, respectively. Australian equities, however, lagged again as the Reserve Bank of Australia’s (RBA’s) “material forecast miss” on the 3Q inflation has priced out any near-term rate cuts. Global bonds were also modestly higher, with the Bloomberg Global Aggregate index up 0.8% (in local currency total returns).

On the U.S.-China trade front, both sides appeared to pursue a policy of “escalate to de-escalate,” which concluded in the Trump-Xi meeting in South Korea, where both sides agreed to postpone export controls. China will also resume soybean purchases in exchange for the U.S. lowering fentanyl tariff rates by 10% on China. This bilateral compromise signals a mutual preference to avoid a hard decoupling and marks a new phase of trade truce. That said, strategic competition remains, and bilateral trade is likely to stay subdued as both economies intensify efforts to strengthen domestic supply chains, especially in critical technology sectors.

The monetary policy also adopted a more hawkish stance, with Chair Jerome Powell emphasizing the “strongly differing” views within the Federal Open Market Committee (FOMC) and indicating that a December rate cut is “far from” a foregone conclusion. The widening divergence within the FOMC was likely amplified by the lack of key economic data, such as non-farm payrolls, which impedes informed decision-making. Should the government shutdown persist, it will further complicate the FOMC’s view and contribute to increased volatility in the rates’ market.

In Asia, policies and politics are evolving. China’s fourth plenum concluded with priorities for the upcoming Five-Year Plan largely in line with consensus expectations, focusing on high-quality development, technological self-sufficiency, and strengthening domestic consumption. In Japan, the newly elected Prime Minister Sanae Takaichi has advocated a commitment to expansionary fiscal policies through tax cuts and a dovish stance on monetary policy. These policy directions are expected to support economic growth and equity markets, albeit at a varying pace due to the structural versus cyclical nature of these changes.

While the long-term economic benefits of AI are undeniable, concerns over elevated valuations in U.S. equities have intensified. And although strong 3Q earnings results thus far have fended off these worries, current valuations necessitate continued robust earnings performance, setting high expectations for the U.S. equity market to deliver.

Australian economy

• 3Q headline inflation surged to 3.2% year-over-year (y/y) while the trimmed mean inflation also rose to 3.0% y/y, at the upper bound of the RBA’s 2%-3% target band. Pressure was broad-based, with 48% of prices increasing by over 3% quarter-over-quarter (q/q) annualized, up from 39% in the previous quarter. Large increases were noted in electricity and gas prices due to the end of state government rebates, holiday travel and accommodation prices, and housing-related prices as new housing purchases picked up.
  (GTM AUS page 5)
• The unemployment rate rose to 4.5% in September, its highest level since 2021, as the total employment  increase of 14.9k was outpaced by a larger labour force with the participation rate rising to 67.0%.
  (GTM AUS page 9)
• Household spending increased 0.1% month-over-month (m/m) in August, with the slight rise in discretionary spending being offset by a small fall in non-discretionary spending.
• Consumer sentiment declined in October, with the index down 3.5% to 92.1, its weakness attributed to concerns over higher inflation and higher interest rates.
  (GTM AUS page 6)
• Business conditions edged up to +8 in September, with gains in the trading and profitability sub-indices but a softer reading on the employment sub-index.
  (GTM AUS page 8)
• Housing prices rose 1.1% m/m in October, with broad-based growth across capital cities, as housing demand strength reflected above-average levels of investor activity and first home buyers taking advantage of the expanded 5% deposit guarantee scheme.
  (GTM AUS page 10)

Equities

• The ASX 200 edged up 0.4% in October, as the renewed optimism from global equity markets was weighed down by hotter-than-expected inflation and a repricing of RBA rate cuts. Sector performance was mixed, with materials (+4.3%) leading on the U.S.-Australia Critical Minerals Framework, while Technology lagged due to ongoing governance issues (-8.4%).
• Global equity markets were positive in October, with the MSCI AC World Index returning 2.8%. Most indices gained, with the MSCI EM Index up 4.6%. MSCI China was an outlier, with the worst performance by far at -3.9%. A sudden renewal of U.S.–China trade tensions, with China rolling out rare earth export restrictions and the U.S. threatening a 100% tariff on Chinese goods, jolted the market. Although a de-escalation occurred near the very end of the month, the events still shook markets.
  (GTM AUS page 34)
• In the U.S., the S&P 500 was up 2.3%, once again reaching new record highs in October, driven by positive earnings reports and benign inflation numbers.
• Equity valuations were stretched further in most developed markets, with forward price-to-earnings (P/E) ratio for the S&P 500 at 22.9x, MSCI Europe at 14.8x, and MSCI Japan at 16.9x, while the ASX 200 fell to 19.3x.
  (GTM AUS page 35)

Fixed income

• The 10-year yield on Australian government bonds ticked down by one basis point (bps) in October to 4.30%. U.S. Treasury yields (USTs) were firmer over the month, with the 10-year yield down 6 bps and 2-year yields roughly flat, as markets continued to price in more easing from the Fed, temporary concerns over the credit market, and the end of the quantitative tightening program, before paring back on Powell’s note that December is far from a foregone decision at the October FOMC meeting. Yields on Japanese government bonds were also modestly higher, as markets gradually priced in a higher terminal rate as a consequence of the Bank of Japan (BoJ) falling behind the curve, with the 10-year yield up 2 bps to 1.65%.
  (GTM AUS page 53)
• Spreads on both investment-grade and high-yield bonds widened modestly as negative sentiment weighed on credits, before concerns were dismissed and spreads regained on a string of solid earnings results, with global investment-grade and high-yield bonds returning -0.1% and 0.7% in USD total return terms, respectively.
  (GTM AUS page 52)

Other assets

• Oil prices dropped, with the WTI down around 4% and Brent down almost 2%. OPEC+ oversupply drove the initial drop, although prices recovered slightly on new sanctions on Russian oil and an improvement in U.S.-China trade relations. Gold continued to attract investor interest, breaking above USD 4,000/oz on safe-haven demand and central bank buying.
  (GTM AUS page 64, 66)
• The U.S. dollar DXY Index gained 2.1% in October, as Chair Powell’s comments dialed back market expectations for a December rate cut. The Japanese yen was the weakest G10 currency, falling 4.1% against the U.S. dollar, as the BoJ skipped an October hike and offered limited forward guidance. Most other Asian currencies were also slightly lower over the month.
  (GTM AUS page 68)

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