Quarterly Report
RESILIENCE AT A HIGHER PRICE
The third quarter was shaped by the return of energy-driven inflation and a sharp rise in global interest rates. Middle East tensions returned to the foreground, pushing Brent crude oil above $100 per barrel and renewing concerns around inflation and energy supply. The rise in oil occurred against a backdrop of resilient economic activity and generally constructive corporate earnings. This combination proved important. Growth remained firm enough that central banks had less scope to look through the inflationary effects of the shock, even as uneven labor data and continued housing weakness pointed to greater pressure in some areas of the economy. After holding rates in July, the Federal Reserve raised its policy rate by 25 basis points in September. The European Central Bank and Bank of Japan also adjusted policy rates higher during the month, while the Bank of England remained on hold with a divided vote.
Interest rate markets absorbed the greatest adjustment. The 10-year Treasury yield rose more than 80 basis points to 5.29%, while sovereign yields also moved materially higher in Europe, the U.K. and Japan. Most of the increase in the U.S. 10-year yield came through higher real yields rather than longer term inflation expectations. The adjustment therefore extended beyond higher near-term inflation concerns. Rising real yields increased discount rates across markets, placing greater pressure on longer duration and financing sensitive assets.