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Market index returns
Week to date since November 8, 2023 as of November 15, 2023
Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.
Market commentary:
Markets have remained in risk-on mode, with the broader global equity markets picking up >3% during our review period. Incoming data in the U.S. and around the world shows inflation continuing to decelerate, relieving some of the pressure on central banks to maintain their hawkish agendas. Further stoking investor confidence are sustained expectations of a soft landing in the U.S. while investors also appear to be discounting the regional conflicts in both the Middle East and Ukraine. Among the Real Assets classes, Natural Resource Equities had the strongest returns, led by a rebound in base and bulk mining companies. Global Real Estate securities and Global Infrastructure securities also outperformed the broader equity markets, while Commodities had a positive return but lagged the broader markets, and TIPS had a mildly negative return.
Why it matters: Equity market volatility remains subdued, but bond market investors are still on edge, even as the U.S. 10-year Treasury yield settles in around the 4.5% level. Moody’s went so far as to change the U.S. government’s credit rating outlook to negative this week, an event most equity investors brushed aside. A government shutdown in the U.S. looks to be avoided for now, but a day of fiscal reckoning looms. Global economic growth is expected to slow in 2024, and it is unclear if recessions can be avoided. In our view, portfolio diversification can offer a hedge against these uncertainties, and Real Assets are well-suited to the task. The necessity-based traits of many Real Assets can be attractive during periods of slower growth while offering low correlations to other asset classes and attractive long-term return potential. Additionally, Real Assets can play an important role in many secular changes, such as electrification, energy transition, the need for clean water, and even artificial intelligence (AI).
Digging deeper: Below, we review new inflation data in the U.S. that has not only added to the positive market sentiment but might deal the final blow to the U.S. Federal Reserve’s (Fed’s) current rate hiking agenda. We also touch on economic conditions in the UK and the state of economic affairs in Japan where our hard-earned U.S. dollars have continued to gain purchasing power. We then wrap up on the subject of chemistry as we consider whether Copper is having a reactive moment.
Why it matters: Equity market volatility remains subdued, but bond market investors are still on edge, even as the U.S. 10-year Treasury yield settles in around the 4.5% level. Moody’s went so far as to change the U.S. government’s credit rating outlook to negative this week, an event most equity investors brushed aside. A government shutdown in the U.S. looks to be avoided for now, but a day of fiscal reckoning looms. Global economic growth is expected to slow in 2024, and it is unclear if recessions can be avoided. In our view, portfolio diversification can offer a hedge against these uncertainties, and Real Assets are well-suited to the task. The necessity-based traits of many Real Assets can be attractive during periods of slower growth while offering low correlations to other asset classes and attractive long-term return potential. Additionally, Real Assets can play an important role in many secular changes, such as electrification, energy transition, the need for clean water, and even artificial intelligence (AI).
Digging deeper: Below, we review new inflation data in the U.S. that has not only added to the positive market sentiment but might deal the final blow to the U.S. Federal Reserve’s (Fed’s) current rate hiking agenda. We also touch on economic conditions in the UK and the state of economic affairs in Japan where our hard-earned U.S. dollars have continued to gain purchasing power. We then wrap up on the subject of chemistry as we consider whether Copper is having a reactive moment.
- U.S. sees liberation from inflation: Fresh Consumer Price Index (CPI) and Producer Price Index (PPI) data was released for October in the U.S. this week, which showed the level of inflation continuing to recede. The data was almost universally lower than expectations and lower than September’s levels. CPI showed no increase on a month-on-month basis, and year-on-year prints fell to 3.2% for headline and 4.0% for core (excluding food and energy). PPI showed an even greater decline, with headline month-on-month falling by 0.5% and core month-on-month showing no increase, while year-on-year numbers were just 1.3% for headline and 2.4% for core. In the wake of these releases, investor expectations for any additional rate hike from the Fed (as represented by the futures market) evaporated, with the next move now expected to be a cut sometime in the spring of 2024.
- UK inflation tumbles, but GDP gets knackered: Inflation in the UK also declined across all metrics. Headline CPI, which was 6.7% in September (and higher than 10% earlier this year), fell to 4.6% in the year-on-year print. Core CPI (which excludes not only food and energy but also alcohol and tobacco) also declined but remains elevated at 5.7% on a year-on-year basis. Additional signs of inflation slowing in the UK were evident in the Retail Price Index (RPI) release as well as the latest UK PPI data. However, on the economic growth side, preliminary 3Q GDP showed no growth from the quarter prior, though this was better than the expected 0.1% decline. Expectations for another rate hike (measured by overnight index swaps) by the Bank of England (BOE) were also reduced and currently sit around a mere 5% chance of a hike in either December or February 2024, with potential cuts starting in late spring of next year.
- A “ship, ship, hooray” from the BOJ: The value of the Japanese yen continued to weaken, nearing 152 per U.S. dollar on Monday, which would be its weakest level relative to the dollar in over 30 years (June 1990 to be precise). It’s not just a strong U.S. dollar affecting this relationship; the yen also fell to its lowest value to the euro in over 15 years. The Bank of Japan (BOJ) has intervened at times to prop up the yen, but BOJ Governor Kazuo Ueda is currently staying on the sidelines, acknowledging that a weak yen has both positive and negative effects while hinting he’s willing to allow the current level of stimulus to remain in place for now. While ultra-easy monetary policy has led to the yen’s depreciation and increasing inflation (though still below the BOJ’s target), it has served to boost exports, a welcome side-effect as Japan’s aggregate GDP contracted by 0.5% in 3Q relative to 2Q and by 2.1% from a year ago, both steeper than expected.
- Cu now and in the future: Copper, which is often used as an economic indicator for its ability to presage turning points in the global economy, has recently found itself in a precarious position. This week, the spot metal price traded at a $100 per ton discount to the forward 3-month contract on the London Metal Exchange (LME), the largest gap in 30 years. Copper, which traded in backwardation (where spot prices are higher than future prices) as recently as June, has now found itself in contango (future prices higher than spot) as near-term supply exceeds demand. Overall, benchmark pricing has held up well for the reddish metal, and, with pricing close to flat year-to-date, it ranks as one of the best performing industrial metals. While the new pricing structure indicates supply could remain in excess near-term as economic growth slows, it’s widely believed that we’ll see strong demand for copper longer-term given its various industrial use cases (i.e. electrification, energy transition, and building construction).
What we are watching: First on our list is the sequel to September’s “Government Shutdown Showdown” – while this edition appears less dramatic, it seems a trilogy is being set up for the (hopefully) final conclusion to come next year. Next, we continue to monitor the U.S. labor market where the ice is getting thinner and cracks are starting to emerge. We then review the recent meeting between U.S. President Biden and Chinese President Xi and try to ascertain if it is the start of a cuddly relationship or just another hill of beans. Finally, we conclude with a summary of 3rd quarter returns for direct real estate published by our peers and would encourage you to read their full report.
- Government shutdown averted…again: With the November 18th deadline approaching to avoid a government shutdown, the U.S. Congress passed a continuing resolution (CR) to fund the government (for now). New House Speaker Mike Johnson was able to garner bipartisan support, passing the bill by a vote of 336 to 95, as it lacked the deep spending cuts demanded by members of the hard-right that would have been a non-starter for Democrats, though the bill did not include any wartime aid for Israel or Ukraine. It was quickly passed by the Senate (87 to 11) and now awaits President Biden’s signature, which shouldn’t be an issue. Speaker Johnson has vowed that there will be no more CRs, but rather that full-year spending bills need to be passed in early 2024. However, there’s a catch. Similar to many movie franchises, this ultimate showdown looks to be broken into two episodes as this CR funds some agencies until January 19th and others until February 2nd, creating two different deadlines.
- Is U.S. job market continuing to claim strength?: We continue to watch the labor market in the U.S. closely and have noted a recent increase in both initial jobless claims and continuing claims. This week, initial claims of 231k were higher than expected, higher than the 218k last week, and the highest since a 232k posting in August. Continuing claims were even more telling, coming in at 1,865k, which was 1) higher than expectations, 2) the eighth straight week of increases, and 3) is now at its highest level in two years. While both measures are still low by historical standards, the new trends could belie emerging weakness, especially when coupled with October’s payroll report. Rest assured, we will be closely monitoring November’s payroll report (released on December 8th) to see if the unemployment rate continues to rise from the current 3.9% level and if new job numbers continue to weaken.
- Trading soybeans for pandas: U.S. President Biden met with Chinese President Xi in San Francisco this week, and both declared progress after a 4-hour meeting. The two leaders agreed not only to re-establish military communications to avoid unintended incidents but also discussed fentanyl, climate change, artificial intelligence, and the situation in the Middle East. In a sign of goodwill, China may even resume loaning giant pandas to the U.S. as the last remaining pandas (Zoo Atlanta) are scheduled to leave in 2024, with President Xi even stating pandas have “long been the envoys of friendship between the Chinese and American people.” Unrelated (or maybe not), U.S. exports of soybeans hit an 11-year high last week, with 72% of the 3.9 metric tons headed for China. Poor weather in Brazil has reduced soybean yields, and Argentina is essentially out of inventory, which has led to the world’s largest soybean importer, China, looking to bolster trade ties with the U.S.
- U.S. Property Performance: Our DWS compadres in direct real estate released their 3rd quarter U.S. performance report this week. Overall, using the NCREIF Property Index (NPI) as a barometer, direct real estate saw returns of -1.4% for the quarter, driven by a 2.4% decline in values but buffered by a 1.0% income return. On a trailing 12-month basis, direct real estate has returned -8.4%, which compares to -1.7% for listed real estate (FTSE Nareit All Equity REITs Index) over the same time frame. Within the NPI, retail has been the best-performing property type over the past year, while office has struggled the most. You can read their full report here.
