Please see the below article from Brooks Macdonald, detailing the key news from markets over the past week. Received yesterday afternoon – 14/11/2022
Equities rallied significantly last week as a downside miss to US CPI boosted hopes of less hawkish monetary policy
Equity markets continued their gains on Friday with the US outperforming as investors priced in the implications of the lower than expected US Consumer Price Index (CPI) report.
China releases a plan to ease COVID restrictions and loosen policy for the embattled Chinese property sector
Prior to the Chinese party congress, investors had hoped that the new leadership would feel comfortable easing COVID rules and loosening economic policy. Foreign investor sentiment towards China has become decidedly poorer in the last month however, as investors fear that Xi’s consolidation of power may lead to policies which deprioritise economic growth. Pushing back against some of these concerns, China has released a 20-point plan to ease its zero-COVID policy which has stifled recent economic growth. In addition to this, the government also announced a 16-point plan to support the domestic property sector which has looked increasingly weak in the aftermath of the Evergrande default and as property developers focus on complying with the central bank’s ‘three red lines’ governing leverage. It is too early to say whether these two announcements are part of a broader attempt to provide additional impetus to the Chinese economy however they have been welcomed within Chinese equity markets this morning.
US Central Bank governors have begun to comment on the inflation numbers, warning that more hikes are still needed
Bond and equity markets welcomed the downside miss to headline and core CPI last week which may mean that the US Federal Reserve (Fed) will not need to be as hawkish to keep inflation under control. We are yet to see how the Fed, in aggregate, will respond to last week’s reading but we have heard from a few Fed Governors, including Waller earlier today. Waller said that there was still ‘a ways to go’ in tightening US monetary policy, predominantly as the central bank would need to see a run of softer CPI readings before it gained confidence that it could stop hiking rates. Waller also speculated that some of the exuberance last week echoed the market’s, ultimately premature, rally after the July CPI release which commenced a rally which was eventually snubbed by Fed Chair Powell.
Fed speak will be important as we look ahead to the December Fed meeting and we get further clues as to whether the Fed is now less concerned about inflation. In reality however, Fed sentiment may impact the size of the December rate hike but inflation itself will dictate how high interest rates need to go in 2023.
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Alex Kitteringham
15th November 2022