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Weekly Outlook

Weekly Outlook 07 November 2022 – 13 November 2022

Weekly Commentary: 07 November 2022 – 13 November 2022

Stocks retracted last week as the market reacted to the latest FOMC announcement where the Federal Reserve has hiked its benchmark interest rate for the sixth time this year at 75 bps, the fourth consecutive hike of this size year. Powell’s largely hawkish tone has killed any market expectations of an impending pivot in the near term, in addition to the mounting concerns that the Fed is oversteering the economy passing the point of no return. U.S. October jobs report also remained strong although the U.S. labor market has shown a slower pace of hiring and higher unemployment – Around 261,000 jobs were added in October and the unemployment rate rose by 0.2 pp to 3.7% MoM. As a result, growth stocks as loosely represented by the NASDAQ Composite Index (-5.61%) fared worst and lagged the S&P 500 Index (-3.31%) and the Dow Jones Industrial Average (-1.38%). The other key market indices including the STI (+2.40 %) and the Hang Seng Index (+8.74%), however, managed to deliver positive returns. All eleven S&P 500 sectors mostly reported negative returns with the exception of Energy (+2.41%), Materials (+0.86%), and Industrial (+0.45%). Unsurprisingly, the growth sectors – i.e. Communication Services (-7.44%), InfoTech (-6.84%), and Consumer Discretionary (-5.77%), were the worst hit last week.

The yield-curve continued to be inverted as the 10Y-2Y US Treasury spread further fell by 8 bps to -0.50% last week. Both the U.S 2-year and 10-year Treasury yields rose by 23 bps to 4.68% and by 14 bps to 4.16% respectively. The stock market also turned risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened by 13 bps to 3.10%, although market volatility as shown the CBOE Volatility Index (VIX) has slightly went down by 120 bps to 24.55%.

Market focus next will be on the release of U.S. October Consumer Price Index (CPI) data where it would be a positive for stocks if we see a deceleration from September as it would show that the Fed’s tightening has worked to some degree, although we expect this to be unlikely due to the rising energy prices last month. In September, the U.S. core CPI has accelerated faster by 0.3 pp to 6.6% YoY above market expectation, while headline CPI slowed down by 0.1 pp to 8.2% YoY. The Fed’s preferred inflation gauge – the U.S. Personal Consumption Expenditure (PCE), has its headline rate unchanged at 6.20% YoY in August, but core PCE climbed by 0.20 pp to 5.10% YoY, well above the Fed’s target range of 2%. Globally, rising energy prices remained a concern as it is the primary driving force behind the rising inflation level. Singapore’s CPI in September was unchanged MoM at 7.5% YoY, the highest since the GFC, while MAS core inflation moved up by 0.2 pp to 5.3% YoY. There are also the rest of the 3Q22 earnings announcements where we can expect a more positive market sentiment if the outlook of corporate earnings remained bright enough to offset the aftereffects of the Fed’s policy tightening. So far the earnings season has been mostly positive – around 85% of the S&P 500 companies have reported actual results for 3Q22 where around 71% and 70% of them have reported positive Revenue and EPS surprises respectively.

As can be seen below, most of the global REIT markets delivered positive returns with the exception of Singapore, U.S. and Canada. Back at home, the iEdge S-REIT Index’s (-1.70%) and most of its subsectors ended the week lower with the exception of the Hospitality (+2.16%) and Diversified SREITs (-0.02%) that held up the best. In contrast, Office (-4.64%) and Specialized/Pureplay DCs (-3.23%) SREITs were the worst performing subsectors. REITs overall has been affected by decreasing yield spread as interest rates surged and investors pricing in the possibility of reduced distributions from the increased financing costs, but we do expect inflows to return to the sector when market sentiment improves due to the attractive valuations and yields. With regards to the pandemic, the 7-day moving average of total COVID-19 cases stayed elevated due to the highly transmissible XBB variant, but has been trending down at around four thousand cases. However, there were no further announced changes to the current COVID-19 measures although Health Minister Ong Ye Kung had stated that Singapore “cannot rule out” measure retightening such as the wearing of face masks indoors in the coming weeks.

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