Portfolio Update – October 2023

The month started with renewed tensions between Israel and Palestine. And like last year when the conflict between Russia and Ukraine broke the news, everyone felt entitled to have an opinion and obliged to take sides. Let me emphasize this: there is never a justification for genocide, under any circumstances.

Seeing pro-Israel activists publicly stating that Palestine should be fully wiped out because they “are lesser humans” is disgusting, and in no way better than what the Nazis were saying a century ago. And the same can be said for the ones cheerleading for Hamas, since they literally have the destruction of Israel as main goal. The amount of posts and interviews I’ve seen showing this sentiment, from either side, was way too high and, to be honest, very concerning. As a general rule, if you’re celebrating murders, you should check yourself and the values you stand for.

However, not everything is black and white. One can be pro-Palestine without endorsing Hamas, just as one can support Jews without necessarily supporting the Israeli government. These days, social media and the anger that permeates it often obscure these nuances. History clearly shows who was invaded and who is the invader, but over the years, the line dividing good from bad has become so blurred that it’s safe to say both sides, though in different proportions, have blood on their hands.

This conflict is undeniably complex, and if you don’t possess sufficient knowledge about it and, more importantly, if you’re not directly affected by it, it may be best to refrain from taking sides.

Now, let’s talk about the economy.

United States

In the month of October, inflationary pressures eased, with cost burdens rising at their slowest pace in three years. CPI, PPI, PCE: they came all in-line with expectations. As a result, many companies opted to pass on these cost savings to their customers, and their average selling prices was raised at the slowest pace since June 2020.

Nonetheless, the service sector grappled with persistently high interest rates and economic uncertainties, leading to a third consecutive month of declining new business, albeit at a decelerating rate. In stark contrast, the manufacturing sector reported its most robust rise in new orders in over a year, which can be partially attributed to product diversification and the implementation of new sales strategies.

For the third quarter, GDP was 4.9% annualized, but it was mostly due to inventories buildup. If we were to look at the latest Composite PMI, we would find out that the earlier surge in the service sector, driven by increased consumer spending, has come to a halt and, in the meanwhile, the manufacturing sector is also struggling to regain momentum due to weak global demand. Therefore, the survey suggests that GDP is likely to increase at an annual rate of approximately 1.5%, which is coherent with the Atlanta 4Q GDP estimate of 1.2%.

Moving to the labor market, in October the labor market continued its expansion, albeit at a slightly lower pace compared to September. Interestingly, we know from the PMI report that some companies refrained from replacing voluntary departures due to lingering uncertainty surrounding future demand and ongoing cost-saving efforts.

In September, NFP numbers exceeded expectations by a considerable margin. However, this outcome didn’t come as a surprise, given that President Biden had scheduled a press conference to discuss the report just a day before its release: if the report wasn’t hot, he wouldn’t have wanted to boast about it. Moving on to October, because this Portfolio Update was delayed by a week and I get to cover both prints, not only did NFP figures significantly declined compared to the previous month, but the remarkable September figure also received a downward revision. Also important is the unemployment rate, which increased to 3.9%.

Looking at the jobless claims data, it’s apparent that initial claims are on a declining trend, whereas continuing claims are consistently on the rise: if anything, this dynamic confirms there is an emerging underlying weakness in the labor market, which has yet to be fully reflected in the data.

Federal Reserve

Let’s start with the most important thing for this month: I realized the Fed is done. While I stopped being on the hike camp a while ago, arguing that the marginal difference of 25bps more was negligible and the lag effect risk was too high, at the beginning of this month I realized the market is doing the tightening now and the Fed has no reason to hike more unless inflation accelerates a lot once again. To my surprise, we’re witnessing a success.

In other words, as the economic data continues to be good, and yields continue to rise adjusting to the note issuance, the financial conditions will tighten enough to fight inflation without the need for the Fed action, but at the same time avoiding an economic contraction. The Fed maintains the flexibility to hike if this mechanism stopped to work, and to cut if the economic data started to deteriorate. The latest FOMC, which provided no real insight for the first time in a while, confirmed this view.

However, there remains a problem with the inflation target, as many economists pointed out that bringing inflation lower than 3% will bring the country some pain. Keeping this in mind, all the talk about raising the target from 2% to 3% make a lot more sense.

Looking very quickly at the dollar, for a sustained sell-off we would need the rest of the world to stabilize or recover. However, like you’ll see yourself reading the rest of the newsletter, this doesn’t seem to be the case yet.


Economic conditions in Europe are deteriorating, with the 3Q GDP revealing a 0.4% annualized contraction. Notably, countries such as Germany, Austria, Portugal, Ireland, Estonia, and Lithuania are currently grappling with economic downturns. To put it briefly, companies are contending with rising energy expenses and growing labor costs, which have a particularly significant impact on the service sector. Additionally, increased costs associated with refinancing due to rate hikes have also negatively affected investment and overall business activity.

The inflation situation doesn’t look much better either. In fact, when we exclude energy, consumer prices in the eurozone have risen by 4.9% YoY, and prices for processed food, alcohol, and tobacco remain exceptionally high at 8.4%. Remarkably, core inflation remains similar across all eurozone countries.

It is worth noting that, despite the significant workforce reductions carried out in October, the notable disparity between the headline PMI and the employment PMI strongly indicates the presence of a labor shortage. This situation arises from the difficulty that many companies face in finding suitable candidates to fill their open positions. In essence, the hesitance to lay off workers has led to a job market that remains relatively resilient, even in the face of the considerable economic challenges currently being experienced.

Shifting our focus to the exchange rate, it is noteworthy that the EUR continues to exhibit a lack of adjustment to account for the numerous uncertainties confronting the currency. These uncertainties encompass factors such as tighter financial conditions and the potential risks of geopolitical spillover, all occurring in the context of sluggish economic growth. Given this challenging backdrop and my conviction that the EURUSD has no business in staying above the 1.07 level, I have initiated a short position.

Among the factors contributing to the bearish outlook for the exchange rate, several key considerations stand out:

  • Weak European Growth: The European economic growth remains persistently sluggish compared to that of the United States, as evidenced by the substantial output gaps when compared to pre-pandemic levels. Additionally, Eurozone economic activity data is consistently underperforming relative to consensus, adding to the negative sentiment.
  • Deterioration in Terms of Trade: There has been a notable deterioration in the relative terms of trade for the Eurozone compared to the United States, partly driven by the recent increase in oil prices. While the impact on the EUR has been limited thus far, there is an increased risk of this factor having a more pronounced effect due to rising geopolitical tensions.
  • Yields differentials: European bond yields have risen in tandem with US yields. However, this increase in yields is likely to have a more constraining effect on the Eurozone compared to the United States.

European Central Bank

The ECB chose to held the policy rate steady, confirming the thesis I had last month about the peak rate being behind us. I have written an article with my thoughts and comments on the decision, you can check it out here.

United Kingdom

In the UK, the service sector continued to experience a mild downturn in activity, with businesses facing challenges in the midst of deteriorating domestic economic conditions and stretched household budgets. Indeed, high costs associated with living and conducting business have raised concerns among both companies and consumers, leading to reduced spending. As a consequence, despite a temporary pause in interest rate hikes this autumn, business optimism for future prospects has reached its lowest point in 2023. Furthermore, there has been a significant decline in new orders, marking the most pronounced drop since November 2022: this decline, too, can be attributed to the combined impacts of rising living costs and elevated interest rates, which have adversely affected consumer spending.

On a more positive note, there has been a softening of input cost inflation, driven by falling raw material prices and supplier discounts, which has helped alleviate the pressure on business expenses. However, businesses have still passed on the higher costs of wages and increased fuel prices to their clients, resulting in the most substantial inflation in the average prices charged in the last three months.

Furthermore, employment levels have remained in a state of contraction for the second consecutive month, underscoring the challenges faced by businesses.

Bank of England

On November 2nd, the BoE chose to leave the policy rate unchanged at 5.25%. This decision was as uneventful as it gets for the markets, and the revised GDP growth and inflation forecasts, respectively lower and higher, did not come as a surprise. The statement remained largely consistent with the previous meeting, except for the notable addition of “policy is likely to need to be restrictive for an extended period of time”, which aligns with the bank’s projection that inflation won’t reach its target until late 2025.

Bailey’s press conference offered some intriguing insights, although none of them are particularly groundbreaking. He mentioned that the UK’s labor market has become more flexible than they had anticipated back in August, and he emphasized that private indicators suggest a faster deceleration in wage growth compared to the figures published by the ONS. He also mentioned the conflict in the Middle East, highlighting that it presents an upside risk to inflation, a sentiment echoed by other G10 central bankers as well.

Amidst the cacophony of external market factors, what may have helped GILTs during the press conference was Bailey’s assertion that the central bank should avoid maintaining restrictive policies for an extended period: however, it’s worth nothing that this is a common consideration among central banks. Conversely, what may have dampened the performance of GILTs during the press conference was the statement that the bank is not attempting to manipulate the yield curve.

Similarly to the ECB, the focus of the BoE is shifting from inflation to growth: while more rate hikes are certainly possible (although unlikely), there is growing concern about the weakening state of the economy. Indeed, the influx of dovish economic data is expected to persist in the upcoming months, suggesting that the terminal rate for this particular economic cycle has likely been reached. It’s anticipated that rate cuts may not commence until the latter half of 2024, as the central bank grapples with the delicate balancing act of managing robust underlying price pressures alongside an economy that finds itself in the throes of a mild recession.


This month’s BoJ meeting was of significant importance. Let’s start from the beginning.

At the early phases of October 30th’s RTH, a headline came out from Nikkei: “BOJ to tweak policy again to allow 10-year yields to exceed 1%”. From my short experience following the BoJ, Japan, and the Yen, I can say this was coming directly from the central bank. Indeed, it’s not uncommon for them to intentionally leak information to media outlets, gauge the market’s response, and then make decisions accordingly. These strategic press tests serve two main purposes: to reduce market volatility, and deliberately clear out existing market positions. If you recall, a similar pattern occurred during the meetings on April 28, 2023, and July 28, 2023.

As the headline had already hinted, the BoJ adjusted the upper band of the yield-curve-control (YCC) policy: there is no longer a clear limit set at 1%. However, while it seems that the YCC band is quite clear in its intent, we cannot be entirely certain just yet: we must observe how the markets react, and whether the central bank takes any intervening actions. Furthermore, although there is a big difference between “range” with “fluctuations” being the reference to just having 100bps as the reference in theory, both essentially mean the BoJ is purchasing bonds at 100bps. Similarly, although there’s a theoretical difference between daily and unscheduled actions, if the BoJ conducts unscheduled bond purchases every time yields approach or exceed 100bps, there’s little practical distinction.

These minor adjustments to the YCC policy left some market participants disappointed, as they had hoped for a more significant rollback of the accommodative monetary stance. As a result, the yen weakened in response.

It’s crucial to recognize that Japan grapples with a complex array of issues, including an aging population and the enduring effects of deflation that have spanned decades. And these challenges cannot be resolved quickly: a sudden pivot towards a hawkish monetary policy stance could potentially jeopardize any progress made, possibly leading the country back into a deflationary spiral. This concern is of such paramount importance that the BoJ is willing to face the considerable risk of enduring substantial FX depreciation to avert such a scenario.

In addition to these changes, the bank also raised its inflation forecasts, now anticipating that the CPI will remain substantially above its 2% target for three consecutive years, extending through 2024. Notably, according to this forecast, there is an expectation of 2.8% price growth in 2023, which is more than double the initial projection made shortly after Russia’s invasion of Ukraine last year. The bank foresees that price increases will continue at a similar rate in the upcoming year. However, it does foresee inflation dipping below 2% in the final year of the forecast period, which may be used to justify the central bank’s continued caution in modifying its monetary policy.


Aligning with the anticipated soft landing forecasted by most economists, the Australian economy has continued to slow down, with the GDP falling from 3.7% in 2Q 2022 to 2.1% in 2Q 2023, as consumer demand slowed in real terms due to a decline in real household disposable income driven by higher inflation and higher mortgage interest rates.

While both output and new orders have declined, it would take a more substantial drop to indicate a broader economic recession. Interestingly, despite the ongoing softness in business activity, there hasn’t been a significant reduction in hiring intentions: Australian businesses continue to express the desire to expand their workforce, in line with the ongoing creation of new jobs as reported in official employment statistics.

That said, persistent inflationary pressures both in input and output prices are a concerning factor: indeed, while headline inflation has peaked, its decline is slow and core inflation remains sticky. And most importantly, that does not indicate a return to RBA’s target anytime soon.

Furthermore, between rents surging because of immigration and housing shortage, and housing prices starting to climb once more after a brief dip in 2022, the overall affordability and stability of the housing market remain under substantial pressure. Additionally, the burden of mortgage payments as a share of disposable income has surged, reaching nearly 10%. Compounding this situation is the fact that over 90% of new Australian home loans are on floating rates, exposing borrowers to potential interest rate fluctuations, which could further exacerbate their financial challenges.

In light of these concerns, the RBA has conducted a recent analysis that sheds light on the situation. According to the RBA’s findings, a significant percentage of borrowers, ranging from approximately 5% (when using the “Household Expenditure Measure” or “HEM” for estimating living expenses) to as high as 13% (when employing the “Broader HEM” approach), are facing a predicament where their living expenses exceed their income. The key distinction between HEM and Broader HEM lies in their assumptions about household expenditures. Regardless of the methodology used, both HEM and Broader HEM likely underestimate the true expenses and debt servicing obligations faced by mortgage holders, which raises concerns and suggests that it may be just a matter of time before more mortgage holders encounter financial difficulties due to these mounting challenges in managing their costs.

Royal Bank of Australia

Following her predecessor’s cautious approach, the new RBA governor Michele Bullock maintained the status quo and retained a tightening bias, as widely expected by both economists and money markets. This decision marked the fourth consecutive time that the RBA opted not to raise interest rates.

The decision was based on two main factors, as outlined in the post-meeting statement by the RBA governor:

  1. The RBA had already implemented several interest rate hikes, raising the interest rates by 4 percentage points since May of the previous year. These previous rate hikes were deemed effective in curbing inflationary pressures and guiding them back towards the RBA’s target range of 2-3 percent.
  2. Considering the current economic outlook, the RBA decided to keep rates unchanged to conduct a more thorough assessment of the impact of the previous rate hikes and gain a better understanding of the evolving economic landscape. In essence, the RBA acknowledges that while the past rate hikes have been beneficial, the economic future is clouded by uncertainties related to factors like developments in China and fluctuations in fuel prices.

The series of rate pauses also indicates that the RBA would require a significant shift in economic data to prompt any further action. However, similarly to what I said already regarding the United States, the RBA’s stance does not signify an end to the battle against inflation. Indeed, while there has been some progress in lowering CPI, overseas services price inflation is proving surprisingly persistent and the same could potentially occur in Australia as well. Another upside risk for inflation is the jump in population growth, which helped to ease labor shortages at the cost of additional demand.

In any case, the meeting minutes were quite clear about the limited room the board has for accommodating unexpected upward surprises, stating that there is a “low tolerance for a slower return to the inflation target than currently expected.”

New Zealand

Similarly to Australia, New Zealand households and businesses are grappling with rising debt servicing costs, leading to an increase in the share of mortgages in arrears, which had previously been at low levels. Approximately two-thirds of the mortgage debt that had been secured at very low interest rates during the early stages of the pandemic has now transitioned to higher interest rates, and such transition is anticipated to continue in the coming year. The effective mortgage rate, which represents the average rate paid across the entirety of mortgage lending, is projected to reach 6.4% by mid-2024, compared to its low point of 2.9% in late 2021.

As time passes, more borrowers are likely to encounter difficulties in meeting their obligations, as there can be extended delays between the rise in debt servicing costs and borrowers falling behind on their payments. Furthermore, if unemployment rates continue to rise and domestic economic activity continues to decelerate, heavily indebted households will have fewer options available to avoid defaulting on their debt repayments.

On a positive note, inflation has decelerated to its lowest point in 14 months as of September. However, it’s essential to be mindful of the potential for upside risks in inflation due to the ongoing tensions in the Middle East, which could lead to increased oil prices. An additional risk to inflation lies in the influx of immigrants, which could potentially fuel domestic demand for an extended period. However, the volatility of immigration data complicates the assessment of the impact of these newcomers on the economy.

Royal Bank of New Zealand

This month, the RBNZ has decided to maintain its cash rate at 5.5% for the third time, and appears confident it has done enough to return inflation to target next year, even as some economists predict it will need to hike once more to get the job done. The economy has proved to be stronger than anyone expected, notching growth of 0.9% in the second quarter, and there are concerns inflation may not slow as quickly as the RBNZ would like.

As it’s the case for other central banks as well, the RBNZ is done raising rates: the full effects of 525 basis points of tightening since October 2021 are just beginning to emerge, as evidenced by the Financial Stability Report. The money market is currently pricing in rate cuts as early as August 2024, but it wouldn’t surprise me if we were to see them in the first quarter already as the focus switches from fighting inflation to reviving demand.


As of November 4th, 2023, my investment portfolio consists of MOWI, MC, GS, BX, QUBT. My trading portfolio instead is short EURUSD and, with less size, EURJPY.