Market Update

Despite another eventful week for Prime Minister Liz Truss, London stocks managed to end the week on a positive note. Truss abandoned plans to reduce corporation tax and dismissed Chancellor Kwasi Kwarteng, with Jeremy Hunt taking his place. The pound also saw gains, reaching 1.13 against the dollar, marking its most significant increase in nearly two years after hitting record lows a few weeks ago.
Towards the end of the week, bond yields fell as the Bank of England concluded its intervention, which had started on Monday with the bank doubling its daily purchases to £10 billion to stabilize the gilt market.
Shifting our focus to the US, President Biden's administration announced new export restrictions, including measures to safeguard domestic semiconductor chip supplies. This followed the signing into law of the CHIP for America Act, providing $280 billion to support semiconductor manufacturing, design, and research, which is seen as a significant boost to the US economy.
US stocks closed higher on Thursday after the annual US inflation rate slowed for the third consecutive month to 8.2% in September, down from 8.3% in August, though it exceeded market expectations of 8.1%. Rising food prices and rent offset a 4.9% drop in gas prices last month. The core inflation rate, which excludes food and energy, rose to 6.6% year-on-year, up from 6.3% the previous month, despite Fed interest rate hikes.
The unexpectedly high CPI data underscored the Fed's concerns that higher interest rates have yet to significantly impact inflation. This further supports the notion that the Fed will raise rates at a slower pace than initially anticipated. In this week's Fed minutes, officials reiterated the need to "calibrate" the pace of future interest rate hikes to minimize negative economic effects. Despite this, strong US retail sales suggest that consumer spending remains robust, which is positive for corporations.
The National Congress of the Chinese Communist Party is set to commence on Sunday in Beijing, where President Xi Jinping is expected to secure a third term. This event could present an opportunity to gradually transition away from the stringent zero-Covid policy that China has adhered to for an extended period. While an immediate shift in the narrative is unlikely, China has already eased domestic travel restrictions, approved group sporting events, and reduced Covid quarantine periods. As China continues to reopen, sectors such as luxury goods, hospitality, and travel are expected to experience increased demand. China's inflation data, at 2.8%, came in lower than expected and significantly lower than other major economies, which is advantageous for Chinese companies as the economy continues its recovery.
Japan officially reopened to visitors this week after over two years of Covid-19-related isolation. Entry remains subject to strict restrictions, including PCR tests, visa requirements, and mandatory mask-wearing. This reopening is expected to revitalize Japan's tourism industry, potentially strengthening the currency as the yen had reached record lows against the US dollar earlier this year. It reflects the ongoing global reopening process as governments gradually ease lockdown measures, signaling the end of constrained economic growth.