Major U.S. stock market indices rebounded to new all-time highs in October following September declines. Crude oil benchmarks climbed to multi-year highs while natural gas remained elevated. Third quarter real GDP grew 2.0% annualized, with the delta variant, moderating fiscal stimulus, supply chain shortages, and subdued labor participation weighing on the economic recovery. Consumer spending continued to shift back to services, like restaurants and travel, while goods spending moderated as vehicle sales declined sharply. Covid outbreaks and lockdowns in Southeast Asia impacted factories further disrupting the fragile semiconductor and auto supply chains. Labor participation remains subdued in the U.S. as total employment remains five million below pre-Covid levels. Lower labor participation has been consistent across demographic groups including men, women, working age (25-55), and age 55+. The tight labor market conditions have driven rising wages, which could serve to attract individuals back into the workforce.
Through September, central banks around the world continued to be extremely accommodative, keeping interest rates low amid strong economic growth and viewing inflation as short-term. In October, bond markets shifted to reflect the potential for more “hawkish” (less accommodative) monetary policy as central banks extend their expectations for elevated inflation. Hawkish policy would include faster than expected reduction in central bank asset purchases and/or rate hikes. As you can see below, 2-year benchmark interest rates climbed in the U.S., Canada, Australia, and the U.K. following over a year and a half of hovering near zero. Canada’s central bank announced an end to asset purchases as the Canadian 2-year government benchmark bond yield doubled to over 1% in October. The most important market-related event in the month ahead is likely to be the Federal Reserve’s updated policy commentary/outlook, due the week of November 1.
-Jared J. Ruxer, MS