Market index returns

Month to date since September 30, 2023 as of October 31, 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.

• Hiking cycle has likely flat-lined: Following the European Central Bank’s (ECB’s) decision to hold rates steady the week prior, both the Fed and BOE held policy meetings this week, which resulted in no change to benchmark rates. Fed Chairman Powell, in his remarks, noted the strength of consumers and small businesses while also stating, “The process of getting inflation sustainably down to 2% has a long way to go,” commenting that slower growth and softer labor markets are still likely needed to tame inflation. Yet investors took the meeting as a bullish sign, with equities and bond markets rallying in the aftermath. U.S. Treasury yields have dropped considerably in recent days from the 5.0% level seen in October, down to around 4.5% as we write. While the rate decision at the Fed was unanimous, voting at the BOE was a bit contentious, with 3 of the 9 members voting for a rate increase as inflation in the UK remains highly elevated at 6.7% in September, far from their strategic target of 2%. 
• Not much of a pulse in Europe: Recent data from Europe shows not only inflation continuing to fall but also economic activity having little life. Germany, the largest economy in the Eurozone, reported an economic contraction of 0.1% in 3Q, which follows an expansion of just 0.1% in the prior quarter. A wider view of the Euro area saw a similar contraction of 0.1% in 3Q, though it would be a meager 0.1% expansion if we only counted the official EU members. The greatest weakness was seen in Ireland, where GDP contracted by 1.8% from the prior quarter, while the strongest was a 0.6% expansion in Latvia (after two quarters of negative growth). On the brighter side, reported inflation continues to fall, with early estimates of annual inflation falling to 2.9% for the Euro area in October from 4.3% in September. While Germany is estimated to show similar results for the month (3.0% from 4.3%), at least two Euro area countries are expected to see deflation: Belgium (-1.7%) and the Netherlands (-1.0%).
• The incredible shrinking jobs report: As if on cue, Fed Chair Powell asked for signs of softer labor market data, and the October jobs report delivered. Initially, there were concerns this week as the most recent JOLTS report showed 9.6M job openings in September, more than expected and up from 9.5M in August (though itself revised down from 9.6M) and weekly initial and continuing claims remained in calm territory at 217k and 1,818k, respectively. However, new payroll data showed a cooling trend; just 150k jobs created in October, below consensus estimates of 180k, far lower than the 297k in September, and aside from 105k in June, the lowest print since 2020. Additionally, the unemployment rate ticked up 10 bps to 3.9%, the highest since January 2022. Not only did the yield on the 10-year Treasury continue to decline (as noted above), but odds of any additional rate hike by the Fed have been further reduced with the futures market now indicating a less than 9% chance of any additional hikes. 
• Specter of supply haunts Sunbelt apartments: Earnings results in 3Q have been volatile for U.S. apartment REITs, driven primarily by capitulation in rental growth in the sunbelt markets. Heading into earnings season, expectations were that rents would moderate across the board and same-property NOI figures would slow as COVID reopening tailwinds faded and consumer sentiment began to slow. However, the fear of heightened supply in the Sunbelt significantly impacted apartment REITs with exposure there. Three REITs with Sunbelt exposure all reduced guidance and indicated negative new lease growth for October. Additionally, despite a more positive narrative around coastal exposure, due to lower supply concerns, results within the coastal peer set were mixed. We would also note weakness in apartments with retail tenancy exposures (such as to Rite Aid) and a general malaise in the San Francisco and Seattle regions.

• Paranormal activity at the U.S. Treasury: While expected new issuance from the U.S. Treasury helped drive rates higher in September and October, on Monday, October 30th, the U.S. Treasury released estimates of net marketable borrowing for the final quarter of 2023 at $776B and the first quarter of 2024 at $816B, both lower than the $1.0T issued in 2Q23 and lower than market participants had anticipated for 4Q23 as incoming revenue has been higher than expected as of late. On the first day of November, the Treasury gave more details on expected refunding with less reliance on longer-dated bonds (i.e. 10-year and 30-year) in the near-term, while keeping the issuance of shorter-term bills elevated. As noted above, this did help in bringing down the 10-year yield (and juicing equity markets), but over time the Treasury will need to shift issuance to longer-dated bonds (and fewer bills) to get back within the ranges set by the Treasury Borrowing Committee.
• China’s recovery remains in zombie status: Recent economic data out of China shows the recovery there has yet to apparate. PMI data for October came in lower than September almost across the board, with Manufacturing PMI even reentering contractionary territory at 49.5 (from 50.2 in September). Import and export activity also remain in decline on a year-over-year basis at -4.5% and -2.9%, respectively, though the pace of decline is slowing. We would also note some liquidity concerns as China’s benchmark overnight repo rate jumped by 255 bps on the final day of October to about 4% before the PBOC stepped in to inject 19B yuan (~$2.6B USD) through open market operations. While the PBOC and many investors see the rate spike as a one-off, many expect reserve rate requirements to be cut in the near future (or other policy easing), which would help with liquidity needs.
• Two-headed REIT monster on Merger Monday: On the day before Halloween, we awoke to news of not just one but two announced U.S. REIT mergers. In the first, net lease behemoth Realty Income (O) was acquiring their smaller net lease peer, Spirit Realty (SRC), in an all-stock merger with a total deal value of $9.0B, which represented a premium of 14% to SRC’s unaffected stock price. While O is already by far and away the largest net lease REIT in the U.S., if and when the deal closes, O should have an enterprise value of about $63B. In the second announcement, diversified healthcare REIT Healthpeak (PEAK) announced an all-stock merger with Physicians Realty Trust (DOC), which primarily invests in medical office properties. This transaction valued around $4.6B represented a less than 1% premium to DOC’s unaffected stock price and should give way to a $20B enterprise value entity when complete.
• The spooky price of treats: As we sort through our children’s Halloween candy looking for our own favorites, we can’t stop trying to put a price on each individual piece when we know that Sugar (+56% YTD) and Cocoa (+53% YTD) are by far the best performing commodities through the end of October. Global sugar supplies have tightened dramatically following drier-than-normal weather in key producers India and Thailand and, more recently, on weather-related concerns in Brazil, where cane crushing could slow. Meanwhile, drought and disease in the key cocoa-producing region of West Africa have forced a supply deficit, leading to all-time price highs for the beloved bean. Don’t come to our house next year, as we’ll likely be handing out packs of Triscuits, which are comprised of just wheat (-33% YTD), canola oil (-6% YTD), and salt (flat per PPI data through July).