Markets closed November in a positive mood thanks to tentative signs of economic moderation in the US and falling inflation across developed markets. Data releases broadly supported the view that central banks have reached the peak of their tightening cycles, aiding both equities and fixed income.
Major stock indexes gained over the month, with the US’s S&P 500 index rising the most (up 9.1%) and growth stocks – in particular the technology sector - outperforming their value counterparts globally.
Government bond yields declined. The US 10-year Treasury yield fell below 4.4% by the end of November, down from the peak of 5% reached in mid-October. In Europe, the German 10-year yield fell around 20 basis points, and the BTP-Bund spread tightened slightly after a positive ratings update for Italian sovereign debt.
Commodity prices contracted from their October peaks. Despite the ongoing conflict in the Middle East, the price of a barrel of Brent crude oil fell to $80, in part thanks to an increase in US supply and OPEC+ members’ failure to adhere to production quotas.
The natural gas price fell 15% during the month, reflecting expectations of lower demand due to an expected economic slowdown, mild weather and high storage levels in Europe.
Exhibit 1: Asset class and style returns
Source: Bloomberg Barclays, FTSE, LSEG Datastream, MSCI, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Bloomberg Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2023.
Macro news
The market was particularly encouraged by the release of the US Consumer Price Index (CPI) reading for October, which was cooler than expected. Headline and core inflation dropped to 3.2% year-on-year (y/y) and 4.0% y/y respectively. The biggest driver of the decline was a fall in energy and gasoline prices, followed by lower travel costs and hotel rates.
The fall raised hopes that inflation could touch 2% before the end of 2024, and reduced investors’ expectations of a final interest rate hike by the Federal Reserve (Fed) at its December meeting. Although we and the market are convinced that peak policy rates have been reached, the November Federal Open Market Committee minutes made clear that the Fed is determined to hold policy rates at elevated levels for an extended period.
While economic data remained resilient, there were some signs that the US economy is cooling. Initial and continuing jobless claims rose modestly and credit card delinquencies continued to pick up. Retail spending fell modestly in October, suggesting consumers are moderating their spending patterns after a strong run through the middle of the year. The Empire State manufacturing survey's headline number was strong, but the new orders (-4.9) and employment (-4.5) components looked weaker.
The UK also saw a bigger-than-expected fall in headline and core inflation to 4.6% y/y and 5.7% y/y respectively. A fall in services inflation could make the Monetary Policy Committee more comfortable with holding rates, despite still elevated wage growth. There were some signs that economic activity has bottomed in the UK, with the flash November services Purchasing Managers’ Index moving above the critical 50 mark that distinguishes expansion from contraction.
In Europe, Eurostat’s flash CPI release for November showed headline and core inflation slowing to 2.4% y/y and 3.6% y/y respectively. Lower energy prices were the major contributor to the fall, but within the core print both goods and services inflation also eased. Despite recent progress, the minutes of the European Central Bank’s last meeting suggested it remains vigilant to upside inflation risks.
European industrial production and manufacturing activity remain depressed, mainly due to poor data from Germany and France. However, eurozone Q3 employment growth was robust, rising 0.3% quarter-on-quarter (q/q).
China macro data was more positive than expected, with retail sales up 7.6% y/y in October. However, the housing market remains a notable drag on growth, and new home sales continued to fall on a year-over-year basis.
The People’s Bank of China injected liquidity into the Chinese banking system once again and a new required reserve ratio cut could arrive before year end. However, more fiscal stimulus is likely needed to support consumer sentiment and alleviate deflation headwinds.
The meeting between the Chinese and US presidents culminated in various agreements on energy transition and climate change. This could hint at lower tensions between the two superpowers, with potentially positive implications for global markets.
Equities
Ongoing economic momentum, particularly in the US, and tight labour markets reinforced market hopes for a soft landing. This supported equity markets through November, with the S&P 500 Index now up 21% year-to-date. European indexes also closed the month in positive territory. The MSCI Europe ex-UK Index gained 7% over the month, with the financial sector in particular benefitting from stronger interest margins and profits.
Japan continued to be the year’s top performer, up 5% in November and 29% year-to-date despite a disappointing Q3 GDP growth release (-0.5% q/q).
Lower bond yields and healthy corporate earnings boosted growth stocks and the tech sector, which outperformed value peers. Small caps rallied in November with the MSCI World Small Cap Index gaining 8% over the month. However, large caps have still outperformed year to date, by around 12 percentage points.
In emerging markets, MSCI China’s gain of 2% in November supported the MSCI Emerging Markets Index, which grew 8% over the month and is now up 6% year-to-date.
Exhibit 2: World stock market returns
Source: FTSE, LSEG Datastream, MSCI, S&P Global, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2023.
Fixed income
Core government bonds reversed some of their previous losses on the back of hopes for rate cuts next year. The 10-year US government bond yield fell below 4.4% after having tested 5% in October, and despite Moody’s downgrade of the US sovereign debt outlook to negative.
German Bunds and UK Gilts also saw significant yield declines, with the 10-year yields ending the month at 2.4% and 4.2% respectively (both down around 50 basis points from their October highs).
Outside of sovereign bonds, the entire fixed income market benefited from lower yields and more rate cuts expected in 2024. Investment grade bonds gained, and rising hopes for a soft landing supported high yield bonds where spreads tightened. Emerging market debt instruments also had a positive month thanks to more accommodative local central bank policy and a weaker US dollar.
Exhibit 3: Fixed income government bond returns
Source: Bloomberg Barclays, LSEG Datastream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2023.
Exhibit 4: Fixed income sector returns
Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, LSEG Datastream, J.P. Morgan Asset Management. Global IL: Bloomberg Global Inflation-Linked; Euro Gov.: Bloomberg Euro Aggregate - Government; US Treas: Bloomberg US Aggregate Government - Treasury; Global IG: Bloomberg Global Aggregate - Corporate; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2023.
Conclusion
November provided some relief for investors, with both bonds and equities gaining on the month. Data suggesting inflation is easing reinforced investors’ view that most developed market central banks have finished their monetary tightening cycles. Even if it is too early for interest rate cuts, a likely end to policy rate hikes means core bonds can offer diversification against a disinflationary recession – a key investment implication from our Investment Outlook 2024.
Exhibit 5: Index returns for November 2023
Source: Bloomberg Barclays, LSEG Datastream, MSCI, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2023.
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