No Santa Pause

Spooky data out last week showed eurozone inflation surged to a record high in what has to be a Halloween nightmare for the European Central Bank (ECB). And speaking of central banks, last week saw big interest rate decisions by the Bank of England (BoE) and the Federal Reserve (Fed). Both delivered supersized rate hikes of 75 basis points. What’s more, the Fed said that it’s very premature to be thinking about pausing and that rates will have to peak at a higher level than previously expected. Investors hoping for a Santa Claus rally on the back of a Fed pause were wrong-footed, with the S&P 500 suffering its worst rout on a Fed decision day since January 2021. In other news, Airbnb and Uber reported better-than-expected earnings, while OPEC raised its forecasts for world oil demand over the medium and long term.

Macro

Data out on Monday showed eurozone inflation surged to a new all-time high last month. Consumer prices in the bloc increased by a more-than-expected 10.7% in October from a year ago – the highest-ever monthly reading since the eurozone’s formation in 1999, and a marked acceleration from September's 9.9%. Higher energy and food prices (which rose by 41.9% and 13.1% respectively) played a big role, sure, but even the core inflation measure that excludes these two components rose to a record high of 5%. The figures raise the risk that the ECB may have to deliver another 75 basis point rate hike in December despite faltering economic growth in the continent. Case in point: separate data out on Monday showed eurozone GDP increased by just 0.2% in the third quarter – much slower than the 0.8% advance recorded in the second quarter.

Another Fed meeting, another jumbo rate hike: the US central bank increased interest rates by 75 basis points for a fourth straight time on Wednesday. A hike that size was in-line with what traders were expecting after September’s worse-than-expected inflation report, which showed core inflation reaching its highest level since 1982. The unanimous decision lifts the federal funds rate to a range of 3.75% to 4%, its highest level since 2008.

But here’s where things got ugly: in a speech following the rate hike, Fed chair Jerome Powell said “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” On the bright side, he did say that it would be appropriate to slow down the pace of increases as soon as the next meeting or the one after that. But at the end of the day, what really matters is this: the Fed reckons that rates will have to peak at a higher level and stay there for longer. Investors hoping for a Fed “pivot” were wrong-footed, and the S&P 500 suffered its worst rout on a Fed decision day since January 2021.

A day later, the BoE also raised rates by 75 basis points – its biggest hike in 33 years. The increase took interest rates to their highest level since 2008. What’s more, the central bank strongly pushed back against market expectations for the scale of future hikes, warning that following that path would induce a two-year recession. Instead, the BoE presented a scenario in which rates do not rise any further from the current 3%. In this scenario, inflation would peak at 10.9% this quarter before falling to 5.6% at the end of 2023, 2.2% at the end of 2024, and below the BoE’s 2% target in 2025. But even if interest rates stay on hold at 3%, the central bank still forecasts a recession for five quarters on the back of higher energy prices and mortgage costs.

Stocks

Airbnb was the first of the major travel firms to report earnings last week. Investors had expected the third quarter to be a blowout season for the sector on the back of pent-up travel demand after two years of pandemic restrictions. They weren’t disappointed: Airbnb reported its highest revenue and most profitable quarter ever. The number of nights and experiences booked on its platform in the third quarter rose 25% from a year ago to 99.7 million, while the average daily rate for a rental increased by 5%. Both factors drove Airbnb’s revenue 29% higher last quarter to a record $2.9 billion, beating analysts’ estimates. Net income increased 46% year-on-year to $1.2 billion, also topping analysts’ forecasts.

But it wasn’t all sunshine and rainbows. First, the strong dollar is weighing on Airbnb’s results, with more than half of its revenue coming from foreign currencies in the third quarter. In fact, FX headwinds knocked 7 percentage points off of Airbnb’s revenue growth last quarter, and erased 15 percentage points of net income growth. Second, the company gave a disappointing outlook for bookings in the current quarter, and its revenue projections fell short of analysts’ estimates too. Hard-to-please investors didn’t like the sound of that: they sent Airbnb’s shares 5% after the news.

Uber’s stock jumped 12% on Tuesday after the ride-hailing giant reported better-than-expected results and gave a profit outlook that topped analysts’ forecasts. The value of bookings made on Uber's platform – across its ride-hailing, delivery, and freight offerings – hit $29.1 billion last quarter, growing 26% from a year ago. That, combined with higher “take rates” (the percentage of gross bookings that Uber keeps for itself), drove Uber’s revenue 72% higher last quarter to $8.3 billion, beating analysts’ estimates. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) reached $516 million in the quarter, also topping analysts’ forecasts. Finally, Uber projected adjusted EBITDA in the current quarter of $600 million to $630 million, beating estimates of $564 million.

Commodities

OPEC – the group of the world’s biggest oil-producing countries – raised its forecasts for world oil demand over the medium and long term in its latest annual outlook published on Monday. The report said world oil demand will reach 106.9 million barrels per day (bpd) in 2027, an increase of 2 million bpd compared to what the group forecasted last year. The bump reflects a more robust recovery now seen in 2022 and 2023 and a "strong focus on energy security issues" leading to a slower substitution of oil by other fuels such as natural gas, whose price has soared due to the conflict in Ukraine.

What’s more, world oil consumption will climb by 13% from today to reach 109.5 million bpd in 2035 and hold around this level for another decade, according to the group. That prediction clashes with the widespread view in the energy industry that demand will peak at around the end of this decade as the transition to renewables and EVs gathers steam. While the war in Ukraine has provided a temporary boost for fossil fuels, it’s set to accelerate the transition to renewables as European countries seek long-term alternatives to Russian energy supplies. In contrast, OPEC sees oil’s share in the global energy mix, currently at 31%, dipping only slightly by 2045 to 29%.

This week

The third-quarter earnings season continues this week. Some big names reporting include software firm Palantir Technologies, video game publishing companies Take-Two Interactive and Activision Blizzard, EV upstarts Lucid Group, Rivian Automotive, and NIO, and media/entertainment conglomerate Disney. On the economic front, we have eurozone retail sales on Tuesday, Chinese inflation numbers on Wednesday, the latest US inflation reading on Thursday, and UK GDP data on Friday.