US headline inflation took a pause in its downward trajectory in September, even though energy prices rebounded amid a tense geopolitical climate. But core inflation – the US Federal Reserve’s (Fed’s) preferred metric – continued to ease back to normal levels. This makes it unlikely that the Fed will raise its policy rate at its November meeting.
LVMH was the first luxury goods company to report its Q3 earnings, which included a 9% increase in revenue. Its share price fell on the news, suggesting that investors hadn’t fully priced in management’s earlier conservative guidance. The luxury goods sector as a whole has shed over 20% since May, which in our view is creating opportunities.
Gold rallied to USD 1,940 per ounce last week on the back of fresh geopolitical concerns in the Middle East. But despite this upswing, we believe gold is still in a consolidation phase and that any lasting trend reversal will depend on movements in interest rates.
US – consumer spending is holding up well
Bond yields should soon peak
Disinflation is under way pretty much around the world. Consumer price indexes in developed countries are still a little high, but they should drop back to their pre-Ukraine war levels in 2024 or, at the latest, in 2025. Slowing price growth was first observed in manufactured goods and is now reaching the services sector. In the US, for example, rents are finally starting to decline after rising sharply in recent months. This will have an immediate knock-on effect on core inflation, as rents are the main component of that indicator.
Central banks appear to be on the cusp of winning the war on inflation, which means the rate hikes enacted in recent weeks are likely to be their last ones for the time being. That should provide a boost to the bond market, which again struggled over the summer. Yields were sharply up everywhere but Switzerland. US 10-year yields, for example, reached their highest levels since October 2007. At their current level (4.7%), they’re easily making up for inflation expectations over the next decade (2.5% per year). High real yields seem to suggest that nominal yields are close to topping out. As a result, sovereign bonds should once again become an attractive investment, after several years of low or even negative yields. In the lower-quality bond segment, hard-currency emerging-market debt looks like an attractive source of diversification. Their current risk premium (the yield pickup versus investment-grade paper) is quite significant. With a few exceptions, emerging markets have weathered the global slowdown quite well and appear poised for a steeper and stronger recovery than developed countries.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
