Yield curves flattened as long-term bond yields declined while short-dated bond yields rose as investors bet that central banks were moving closer to raising rates.

UK

The FTSE 100 rose 0.5% over the week.

In his annual budget, Chancellor Rishi Sunak used bigger-than-expected tax receipts to pump money into public services and help struggling individuals and businesses. A quicker-than-forecast bounce back from the pandemic has given the Chancellor a £35bn windfall, and he committed to balancing the books with debt falling as a share of national income in 2024-25. The increase in public spending means it is now at the highest level since 1970s, while the planned tax increases will mean the tax burden will rise to 36.2% of GDP by 2026-27, the highest level in the post-war period.

The row over fishing rights between the UK and France escalated, with Paris threatening to step up checks on freight, ban UK trawlers from landing their catch in French ports and cutting off electricity supply to the Channel Islands.

US

The S&P 500 advanced 1.1% over the week, while the tech heavy Nasdaq rallied 2.2%, with both indices closing the month at record highs. Overall, the rebound in US stocks over October, which followed September’s sharp sell-off, meant US indices recorded their best monthly returns so far this year.

President Joe Biden continued to face problems getting agreement on his social spending bill, which has already been halved from its original size of $3.5tn.

The US economy expanded an annualised 2% on quarter in Q3 2021, well below market forecasts of 2.7% and slowing sharply from 6.7% in Q2. It is the slowest growth since a record 31.2% contraction in Q2 2020. Supply chain disruptions, slower consumer spending and a resurgence in COVID-19 were behind the slower growth rate.

The core personal consumption expenditure (PCE) price index, the Fed’s preferred measure of inflation, rose 3.6% in September compared with a year ago, matching levels for the previous three months at the highest level since 1991.

US consumer spending rose 0.6% in September, compared with August’s 10% increase.

Personal incomes slid 1.0% in September, the first decrease in four months, following a decrease in unemployment benefits.

Tesla surged, becoming the first carmaker to hit a $1tn market capitalisation, after rental company Hertz said it had ordered 100,000 of its vehicles.

Third-quarter earnings results were generally strong. UPS, General Electric, Alphabet, Microsoft and Caterpillar also delivered positive numbers, but Apple and Amazon both missed analysts’ expectations.

Facebook changed its name to Meta.

Europe

The FTSEurofirst 300 gained 0.7% over the week.

The European Central Bank left policy unchanged and maintained its guidance to keep interest rates at record-low levels for years to come. ECB president Christine Lagarde acknowledged that inflation was likely to remain high for longer than initially expected, although she predicted it would fall below the central bank’s 2% target by 2023, but she said analysis “did not support” market expectations for a rate rise before the end of 2022.

Eurozone GDP grew 2.2% in the third quarter, an acceleration from growth in the prior quarter and outpacing most other major economies. France and Italy rebounded strongest and beat expectations but growth in Germany and Spain missed forecasts.

The flash estimate of eurozone inflation in October rose to a new 13-year-high of 4.1%.

Germany’s GDP grew 1.8% in the third quarter, a slower rate than expected and a deceleration from the previous quarter’s rate of 1.9%.

Germany’s inflation rate is expected to accelerate to 4.6% year-on-year in October 2021, the highest since October 1993.

The Ifo index of German business confidence fell for the fourth consecutive month, falling to 97.7 in October. This marks its lowest point since April as supply chain bottlenecks spread from manufacturing companies to retailers.

Japan

The Nikkei 225 increased 0.3% over the week.

Pacific Basin ex Japan

The official purchasing managers’ index of Chinese manufacturing activity fell to 49.2 in October, its second consecutive month of contraction weakening, as property construction activity and high commodity prices hit industry.

Core Australian inflation rose to an annual rate of 2.1% in the third quarter, taking it above central bank’s target range for the first time since 2015. The higher-than-expected data caused investors to challenge the Reserve Bank of Australia’s insistence that interest rates will stay at record lows until 2024.

South Korea’s GDP rose by a slower-than-forecast 0.3% in the third quarter as strong exports were offset by weak domestic consumption owing to the country’s tough Covid restrictions. The economy grew at 0.8% in the second quarter.

Emerging Markets

The Brazilian central bank raised interest rates by 150 basis points, its biggest single hike since 2002, as it lifted the benchmark Selic rate to 7.75%. This marks the sixth increase in Brazilian interest rates so far this year and the central bank said it foresaw an adjustment of the same magnitude at its next meeting.

Brazil’s consumer prices increased by 10.3% in the 12 months to early October, well above an annual target of 3.75% for 2021. Among G20 nations, only Argentina and Turkey have higher rates of inflation.

Mexico’s economy unexpectedly shrank 0.2% in the third quarter as a resurgence in Covid cases undercut its recovery. Service sector activity contracted 0.6% during the quarter.

Bonds

The yield on the 10-year US Treasury bond closed the week at 1.57%, a fall of 6 basis points over the week. The 30-year bond yield also declined but yields rose at the short-end of the yield curve. The yield on the two-year US government bond rose to just below 0.5%, its highest level since March 2020. The flattening in the yield curve means the gap between 2-year and 10-year bond yields has plunged to its narrowest level since the summer.

The Bank of Canada added to the short-end pullback by indicating it could raise rates as soon as the middle of next year.

The Reserve Bank of Australia appears to have abruptly halted its bond-buying programme when it refused to defend its bond-yield target. The yield on the Australian government bond that matures in April 2024 exceeded 0.7%, compared to the central bank’s targeted level of about 0.1%.

The yield on the 10-year German Bund closed the week unchanged at -0.11%, although the yield on the two-year Bund rose above -0.60% amid speculation that the ECB would lift rates next year.

10-year UK Gilt yields fell 9 basis points over the week, falling back below 1.0%, as bigger-than-expected tax receipts caused the UK government to cut its issuance plans. In contrast, yields on shorter dated gilts moved higher.

10-year Italian bond yields rose to 1.17% over the week, marking the heaviest sell-off in the country’s benchmark bond since the nation’s Covid-19 crisis in spring 2020.

Commodities

US oil prices rose above $85 a barrel for the first time in seven years, as traders bet that crude supplies would not keep pace with fast-rising global demand and analysts said a wider energy crunch was spreading to petroleum markets.

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Image by Gerd Altmann from Pixabay