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Week in Review: Inflation Finally Slows

Investors celebrated reassuring inflation data this week, as U.S. inflation fell in October by more than expected. The headline consumer price index (CPI) rose 0.4% m/m (0.6% expected) and 7.7% y/y, down from the 8.2% y/y rise in September. More importantly for the central bank, the core measure that excludes food and energy also slowed more anticipated. Core inflation rose 6.3% y/y, from a 40-year high of 6.6% y/y in September. Both stocks and bonds soared on hopes that the U.S. Federal Reserve will hike rates in smaller increments in their upcoming meetings. Various regional Federal Reserve Bank presidents spoke after the CPI print on Thursday, saying they welcomed the inflation slowdown but reiterated that rates will need to rise further and remain in restrictive territory for a while to ensure that inflation stays on a sustainable downward path.

In U.S. political news, interim results from the U.S. midterm elections show that Republicans are expected to win a narrow majority in the House of Representatives, while control of the Senate may come down to a runoff election in Georgia in early December. The predicted “red wave” by the Republican Party has, however, failed to materialise.

In another major setback for Russia’s president Vladimir Putin, Russian troops were ordered to withdraw from Kherson on Wednesday, the first major urban centre captured in its invasion, after Kyiv’s troops launched a counter-offensive. The withdrawal is the most significant military moment in the war since Ukrainian forces swept through the northern Kharkiv region in September.

In the UK, Chancellor of the Exchequer, Jeremy Hunt plans to reduce a surcharge on bank profits to preserve the industry’s competitiveness when its corporate tax rate rises from 19% to 25% in April. The surcharge tax was introduced after the global financial crisis to help offset the costs of government bailouts. In other news, the UK’s GDP contracted by -0.2% in the third quarter, the first quarterly decline since the start of 2021, when the country was in a coronavirus lockdown.

Covid-19 cases surged in China, with new cases in Beijing jumping to the highest level in more than five months. Total daily cases in China reached above 10 000 for the first time in over a year, dampening investor sentiment. However, in a major turning point, China relaxed part of its strict zero Covid policy. On Friday, the government announced reductions in the mandatory quarantine time for inbound travellers as well as testing requirements.

The crypto market was rocked this week after the collapse of one of the world’s largest cryptocurrency exchanges, FTX. Concerns about FTX’s financial health reportedly triggered $6bn of withdrawals in just three days, leading to the exchange facing a capital shortfall. FTX now has an $8bn gap in its finances according to Bloomberg and the Financial Times. On Friday, the company entered Chapter 11 bankruptcy proceedings in the United States, with the CEO Sam Bankman-Fried resigning. The news has sent shockwaves through the digital assets market, with cryptocurrencies falling sharply (Bitcoin down -21.44% w/w).

Global equity markets, with the exception of the UK, rallied this week as risk-on sentiment took hold. In the U.S., the S&P 500 Index recorded its best week since June, surging +5.90%. The Dow Jones jumped +4.15%, while the tech-heavy Nasdaq composite rallied +8.10%. Growth stocks (technology/internet-related) in particular, benefited the most from falling yields, which typically increase the perceived value of future profits.

In Europe, the Euro Stoxx 50 rose by +4.88%, while the FTSE 100 dropped -0.23% – lagging behind its developed market peers. Asian markets caught a bid; with the Hang Seng rising +7.17%, while the Nikkei 225 managed a +3.91% gain. Brent oil prices declined this week, dropping -2.79%, while gold jumped +5.42%.

Market Moves of the Week:

In South Africa (SA), September’s mining and manufacturing data surprised on the upside, with both sectors posting gains despite ongoing loadshedding. Mining production managed a 0.1% rise m/m (August -0.6% m/m) and a quarterly gain of 2.2%. On an annual basis, however, mining production fell by -4.5% y/y, continuing a longer-term downward trend. The largest negative contributors were iron-ore (-23.1% y/y) and gold (-12.4% y/y). September’s manufacturing production expanded at its fastest pace since November 2021 rising 4.9% m/m (August +2.2% m/m) and 2.9% y/y, overshooting Bloomberg’s consensus estimate of -2.4% y/y. The surprise in both sectors has boosted market sentiment, however retail trade sales for the month due next week will help to complete the picture.

Striking public servants have warned of a bigger strike later this month if the government does not meet their wage demands. On Thursday, roughly 500 workers marched to Parliament and delivered a memorandum of demands to a parliamentary official. The action was headed by members of the Public Servants Association (PSA). The PSA has given President Cyril Ramaphosa and his government seven days to respond to its demands, or face a national shutdown. The association is looking for a 6.5% wage increase after the government implemented a 3% baseline increase in October.

In business news, the construction of Amazon.com Inc.’s planned offices in Cape Town should be allowed to go ahead, according to a South African court, in a setback for the indigenous people attempting to stop the development.

The JSE rallied +5.31% over the week, following global markets higher. Resources (+8.63%) surged after metals’ prices rallied and China’s outlook improved. The rand strengthened against the U.S. dollar  over the week to end at R17.25/$.

Weekly market moves carrick

Chart of the Week:

The last time core inflation came in this far under the consensus expectation compiled by Bloomberg was in early 2020, just as the pandemic took hold. So, at last, the problem seems to be improving better than people had feared. Source: Bloomberg

weekly chart
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