Market Overview Oct 2022 EN

MARKET Overview OCTOBER 2022

GLOBAL SCENARIO Despite the volatility, global financial conditions improved in October. Among the central economies, the expectation of a smoother pace of rises in interest rates gained strength. The political turmoil in the UK was stabilized with the election of new Prime Minister Rishi Sunak, who indicated a more responsible fiscal stance.

Inflation continues to be a matter of concern for central banks, which are closely assessing the effects of recent interest rate hikes.

In China, the Congress of the Communist Party confirmed the third term of Xi Jinping and the continuation of the war between Russia and Ukraine adds uncertainty about gas prices during the coming winter.

The DXY index, which measures the strength of the US dollar against a basket of currencies, remained stable in October, with a slight drop of 0.5%.

USA

EUROPE

In the USA, the preliminary GDP data for the third quarter showed an expansion of 2.6% in relation to the second half, showing an important reaction of the American economy. The personal consumption data remains strong, advancing by 1.4% in the third quarter.

Inflation remains under pressure, with an annual increase of 8.2% in the consumer price index (released in October) and a significant contribution from the services sector (3.9%).

The jobs report showed the creation of 263,000 formal jobs in the month of September, confirming that the job market remains heated and the job offer is not growing fast enough to compensate for the salary increase. The consequence is a low unemployment rate (3.5%) and a rising salary increase. The stock markets reacted well in October, with an increase of 13.9% in the Dow Jones index, 8% in the S& P 500 and 3.9% in the NASDAQ.

In the European scenario, the first preview of gross domestic product for the third quarter showed an expansion of 0.2% (2.1% YoY). Consumer inflation remains high. The price index for the month of September increased by 1.2% and the estimate for the month of October is 1.5%. In annual terms, prices are up 10.7%, with emphasis on the high costs of housing, electricity, gas, and other fuels. Food, non-alcoholic beverages, and transportation also pressure prices with almost half of the index composition. September retail sales showed a retraction of 0.3% (ref to August) and in the year the index has fallen by 2%. Industrial production data showed an expansion of 1.5% in August compared to July and despite this, the consumer confidence index remains at a low of -27.6 (data at the end of October). The European Central Bank promoted yet another increase in interest rates in order to slow down the economy and curbing price increases. The ECB raised interest rates by 0.75% to 1.5% a year.

CHINA

LATAM

The Chinese economy showed an important reaction with a gross domestic product growth of 3.9% in the third quarter of this year. In annual terms, producer (0.9%) and consumer (2.8%) price indices are stable. The unemployment rate remains relatively low at 5.5%.

Chinese industrial production continues to improve. In September the advance of the industry improved to 6.2% (from 4.2% in the previous month). The Manufacturing and Non-Manufacturing PMI Index, which measures construction and services activity, fell in October to 49.2 and 48.7 respectively – below expectations. A reading of this index below 50 indicates a contraction in activity, while anything above suggests expansion. It seems too early to celebrate a full recovery of the Chinese economy. One-year loan rates remain stable in a range that ranges from 2.75% to 3.65%.

In Mexico, the preliminary economic growth data advanced by 4.2% per year in the third quarter. The Peruvian economy, on the other hand, grows at a more moderate pace of 1.7% per year. The annualized price indices of the main Latin American economies remain high with an increase of 11.4% in Colombia, 13.7% in Chile, 8.7% in Mexico, 7.1% in Brazil, and 83% in Argentina. In Brazil, the highlight was the second round of presidential elections. Former president Lula beat the current president, Jair Bolsonaro, who was seeking re-election. Lula was elected, after receiving 50.9% of the votes, for a third nonconsecutive four-year term starting in January 2023. Despite the increase in polarization and the small difference in votes between the candidates, the market reacted relatively well to the poll results. The Central Bank, formally independent and committed to price controls, helped to reduce the volatility of local assets, in relation to past elections. Still, it remains to be seen who will be the future minister of the economy. The main question is about fiscal policy. Despite a good personal record (Brazil consolidated a fiscal responsibility process during President Lula's government between 2003 and 2010), the president-elect promised to increase social spending without a clearly defined counterpart.

Many challenges are expected for 2023. Monetary tightening should continue in the US and Europe (possibly at a less aggressive pace) to contain price increases – which may become more persistent. The escalation of geopolitical tensions can quickly aggravate the inflationary process. Uncertainty related to economic activity in China should remain on investors' radars. With this scenario, fixed income increases relevance in the allocation of investment portfolios.

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