Please see Brooks Macdonald’s weekly market commentary below received yesterday evening:
Signs that global inflation may be peaking helped buoy equity sentiment last week
Equities rose last week, with hopes that global inflation may start to ease outweighing increased concerns over the Chinese COVID-19 response.
Wednesday’s Eurozone CPI report will be the latest gauge of European inflation pressure
Wednesday sees the release of the latest Eurozone Consumer Price Index (CPI) report with headline CPI expected to fall from 10.6% to 10.4%. With European natural gas prices far below the peaks set in August, headline European inflation pressures should continue to fall. In terms of other lead indicators, German factory gate prices fell by 4.2% in October month-on-month with UK and US producer inflation also slowing since the summer. This sets up a more constructive backdrop for inflation readings coming into 2023 and has added to optimism within the bond market that inflation figures will begin to slow globally. With energy prices falling, it is likely that we see a peak in headline inflation before a peak in core (excluding food and energy) inflation as it will take some time for additional high energy costs seen in August to work through the global supply chain.
China’s COVID-19 restrictions led to protests over the weekend, increasing the political cost of stricter short-term measures
Over the weekend, a series of protests began against the Chinese government’s COVID-19 restrictions. Whilst the protests themselves do not pose a current threat to the regime in China, it does suggest a population increasingly weary of COVID-19 restrictions, making further lockdowns politically unpalatable. The timing of the recent COVID-19 surge has meant that Chinese authorities have struggled to implement two contrasting approaches, seek to reduce the impact of COVID-19 restrictions on everyday life and the economy, but at the same time, tackle the current elevated case rate. For the time being, policy choices appear to have favoured tougher short-term measures however the protests may change some views in Beijing.
China is likely to continue to find a balance between the broader opening up of China from COVID-19 restrictions whilst also trying to limit the rise in case numbers. It is likely that cases will continue to edge up without a strict containment regime therefore Chinese authorities are likely to favour managing hospital capacity rather than seeking zero COVID-19. One risk is that different local authorities take different approaches, leading to a range of severity in restrictions and a range of economic outcomes for parts of China.
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Andrew Lloyd DipPFS
29/11/2022