December 2022 | Market update

Global inflation may be peaking at last

Despite the days becoming shorter, there was some brighter news for markets in November.

The international monetary fund (IMF) suggested that global inflation might be nearing its peak. This was underlined by lower-than expected October inflation figures in the US – down to 7.7%. The news was met by strong market performances from the S&P 500, NASDAQ and Dow Jones – all seeing their best days in two years.

The Federal Reserve (Fed) continued to fight inflation and raised its benchmark interest rate to a range of 3.75% to 4.0% – its highest rate since 2008. Investors are now waiting to see what the Fed will do next, and notes from November show a majority of policymakers believe rates may not need to rise as quickly as expected from here.

UK’s economy shrinks

UK inflation rose more than expected – to 11.1% in October – with millions of households hit by higher energy bills and the cost of everyday items. Figures also showed the economy shrank by 0.2% in the three months to September, and there are concerns about how long the recession could last.

The Bank of England raised interest rates again in November, to 3%, the largest increase in over 30 years. However, it suggested rates may not go as high as forecast. Chancellor Jeremy Hunt delivered an Autumn budget that included spending cuts and tax rises, as part of the government’s efforts to restore Britain’s fiscal credibility, though in reality many spending cuts will not come into effect until after the next scheduled election. The pound rallied as a result.

Meanwhile, across the euro area, inflation remains high and climbed to 10.6% in October, though it subsequently and unexpectedly fell in November to 10%. Earlier in the month, the European Central Bank raised its interest rate to help control inflation.

In the US, the labour market reported robust figures for October. However, the technology sector is suffering an unstable period, with job layoffs, a decline in revenues and a drop in value for some major social media platforms, manufacturers and ecommerce giants. The pandemic boom for tech was brought down to earth this year with high inflation, rising interest rates, slipping demand and a cost of living crisis paired with a looming recession.

Investors weigh Chinese Covid-19 dilemma

Markets in Asia responded positively after reports that China might relax its strict Covid-19 restrictions next year. However, later in November, authorities doubled down on the lockdowns as cases of Covid-19 rose in Beijing along with some of the first deaths in six months from the virus.

China’s exports also fell for the first time in two years, due to the global economic slowdown and the government’s zero-covid policy. It is feared that shrinking exports will increase the strain on the Chinese economy, which has already been affected by a property market slump and weak consumer demand.