Truce Be Told

Global market performance remained challenged amid lingering volatility. A sharp decline in oil prices dominated headlines, as Brent crude dropped 22% to $60 per barrel, its worst month in over a decade. A confluence of factors drove the decline: an influx of supply from OPEC and U.S. producers, estimates of weaker global demand and waivers on imports from Iran, which further exacerbated supply concerns. While oil was in steep decline, equity markets took a breather from a similar trend in the previous month, though volatility remained elevated. Idiosyncratic risks weighed on select names in the technology sector like Facebook and Amazon, but broader equity markets managed to climb out of the red toward the end of the month, with the S&P 500 finishing 1.8% higher. Stocks reacted positively to an apparent trade truce between the U.S. and China at the G20 summit, as well as comments from Federal Reserve Chairman Jerome Powell that markets look to be “dovish”; both truces helped push U.S. interest rates lower. Meanwhile, global credit spreads widened across the board, and in a reversal of recent trends, higher-quality corporate bonds generally outperformed their lower-quality counterparts.

Concerns about softer growth, coupled with comments from the Fed, tempered market expectations for the path of future rate hikes. Higher jobless claims and a slip in core PCE (the Fed’s preferred inflation measure) in October raised some concern that the U.S. economy might be losing growth momentum. Signs of weakness in the housing market continued to garner attention as well: New and existing home sales softened, and home price growth slowed as mortgage rates have increased nearly a percentage point this year to just north of 5% – an eight-year high. Outside of the U.S., the eurozone continued to see notable softness in economic data: Italy’s economy contracted in the third quarter and the Eurozone Composite Purchasing Managers’ Index (PMI) fell to 52.4 – its lowest reading since mid-2016 – though it remained firmly in expansionary territory. With a backdrop of weakening growth and continued market volatility, a speech by Fed Chairman Powell late in the month drew much attention; his comment that the current policy rate is “just below” the broad range of estimates of the neutral interest rate (in contrast to his comment in early October that it is “a long way from neutral”) was perceived by the market as dovish. While a rate hike in December was still widely anticipated, market expectations for rate hikes in 2019 shifted lower to just one (versus the Fed’s most recent median expectation of three).