Please see below weekly market commentary received from Brooks Macdonald yesterday afternoon, which provides a global market update as we lead up to Christmas.
As markets start the last full trading week of 2022, the outlook for inflation remains uppermost for investors
Equity markets finished last week on the back foot, as the US Federal Reserve (Fed) in particular, but also the European Central Bank (ECB), kept to their hawkish messaging over the inflation and interest rate outlook. But over the week as a whole, while German 10 year Bund yields rose, US 10 year Treasury yields fell, suggesting US bond markets might be questioning the Fed’s inflation outlook. This came as the Fed, ECB, and the Bank of England (BoE) all down-shifted their rate hikes to 50bps last week,1 and US CPI consumer price inflation for November missed analyst expectations on the downside for the second month in a row. In the Fed’s latest summary of economic projections that were published last week, US headline PCE personal consumption expenditures inflation is expected to end 2023 at 3.1%, which would be an almost halving of the 6% rate printed for October.2 Later this week, November US PCE inflation data is due out on Friday, providing markets with arguably the last big economic data focal point ahead of Christmas. Before that, on Tuesday, we will get producer price inflation data for November out of Germany, where October’s print had seen the first month on month fall in producer prices since May 2020.
Bank of Japan meets
Following last week’s jam-packed news flow from the Fed, BoE, and ECB, this week the central bank baton is handed over to the Bank of Japan (BoJ) who are due to announce their latest policy settings on Tuesday. Versus the hiking we’ve seen this year from most major developed central banks, the BoJ has stuck with a loose monetary policy stance with its short-term interest rate at -0.1% and capping 10-year bond yields around 0%3. As a result, interest rate differentials have been a big driver of Japanese yen weakness in currency markets in 2022. Despite Japanese inflation having picked up recently, the ex-fresh food and energy CPI annual inflation rate (the so-called ‘core-core rate’) was running at 2.5% for October,3 still some way below the levels seen in many developed markets elsewhere. On the subject of inflation, Japan’s latest November CPI print is due out on Thursday this week.
EU energy ministers meeting to resume natural gas price cap talks
European Union energy ministers are due to resume talks today, aimed at getting agreement on a natural gas price cap. Despite months of negotiation, EU countries have not yet been able to reach agreement over the cap and the level and conditions to set it at. Indeed, questions remain as to whether a natural gas price cap could ease or in fact actually end up worsening Europe’s energy crisis. For example, representatives from Europe’s biggest gas market Germany have previously cautioned that a cap on natural gas prices in the region could disrupt the functioning of the continent’s energy markets and divert much-needed gas supplies to other regions globally where prices are not capped. According to EU energy regulators in a report published April this year (ACER, the EU’s Agency for the Cooperation of Energy Regulators), the total EU27 storage working gas volume capacity is only approximately 27% of the annual gas consumption in the EU27.4 As a result, despite relatively high storage levels coming into the current winter period, arguably a bigger problem for EU countries will be faced next year and in particular next year’s winter, given expectations of continued energy supply disruption which could challenge efforts to refill gas stores. This suggests the risk of an enduring and unwelcome relative price headwind for both European businesses and consumers continuing in 2023.
Please check in again with us shortly for further relevant content and news.
Merry Christmas.
Chloe
20/12/2022