So far, 2023 is proving to be a year of 2 phases for global equity markets. Stocks generally rallied throughout the first 7 months of the year, despite bank turmoil weighing on markets in Q1, but this upward momentum has since morphed into a correction phase.

The September quarter’s above-consensus reading for both headline and underlying inflation materially increases the risk of a November rate hike next week, in our view. 

Global inflation pressures appear to be easing despite a surprisingly resilient US economy and rising concerns over the global oil price. As we detail in this report, a continued easing in inflation should (all things equal) be supportive for both equities and bonds.

While investors are intensely focused on the outlook for US economic growth and inflation, the strong revival from the US equity market over the past 12 months - alongside rising long-term interest rates - has thrown the spotlight back on global equity valuations.

The US economy has defied the bearish consensus this year, with fears of recession failing to be realized. This has helped US stocks rise, while US bond yields have risen as worst case economic fears fail to materialise.

The Fed began a steady campaign of rate hikes in March 2022, when inflation was approaching its highest level in four decades. Now, with more than 5 percentage points of hikes in the rearview mirror and a fed funds rate of 5.25%, the macro picture looks much healthier.

As is often the case, financial market performance this year has wrong footed the investor consensus on a number of fronts. In this note, we share our thoughts on some of the key financial and economic surprises so far this year, with an eye to the year ahead.

The monthly CPI indicator rose 4.9% in the 12 months to July 2023, according to last week’s ABS release. This headline figure was lower than the consensus expectation of a 5.2% increase and reinforced the market’s view that the RBA will almost certainly keep the cash rate on hold at 4.1% when the board meets this Tuesday.