Improved inflation outlook sends equities higher

Market direction during the month was yet again determined by inflation and the subsequent response of central banks. The Federal Reserve lifted interest rates by another 75bps to combat inflation and signalled that it planned to keep raising, albeit likely in smaller increments. Investors were initially disappointed and risk assets sold off.

Shortly afterwards, however, the October US Consumer Price Index (CPI) came in below expectations sending bonds and equities higher and the dollar sharply lower. Although some of the initial euphoria wore off, equities finished the month in positive territory.

The slowdown in October’s inflation report means that the annualised increase in US CPI over the past four months is only 2.8% compared to 12.2% in the four months prior to that. With signs that rents, which comprise around a third of CPI, have started to fall the inflation picture appears considerably better.

Investors now have a clearer idea where the peak in interest rates is going to be but this is only the first step in building the conditions necessary for a sustained upwards move in equities. The first cut in rates is still some way away and we now must navigate through what is likely to be a challenging earnings season and, despite the recent bounce in the index, investor sentiment remains subdued. Outside of the US, however, valuations look supportive, particularly in the UK.

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