Week ending 9th December 2022.

After anti-lockdown protests in China, the country significantly reduced quarantine restrictions this week, introducing 10 rules to follow on the path to reopening, including allowing individuals to isolate from home. China’s annual inflation fell to 1.6% on year in line with expectations, the lowest figure since March. The fall was mainly attributed to a slowdown in the cost of food. The Hang Seng rallied this week on the prospect of increased demand from China reopening quicker than markets had originally anticipated. As we have said all along, a country with a population of 1.4 billion and pent-up demand creates massive potential for an uptick in consumption.

Policymakers from some of the world’s largest central banks have indicated that they will start to slow the pace of interest rate hikes going forward with signs of inflation easing and growth slowing. Markets are expecting both the European Central Bank, the Bank of England and the Fed to raise rates by 50 basis points.

US producer prices, a key indicator of inflation, edged up by 0.3% month on month in November, the same as the previous month but slightly higher than market expectations which weighed on investor sentiment.

The University of Michigan consumer sentiment for the US jumped to 59.1 this month from 56.8 in November, greater than market forecasts of 56. Inflation expectations for next year also eased to 4.6%, the lowest reading since September 2021.

The Fed will have to consider this data as well as US CPI data, which is due out next week just before their policy meeting on the 14 of December. One must remember that it takes time for policy adjustments to come through in the economic data, policymakers have to be careful as to not overshoot inflationary policy. As such, whilst the slowing of rate hikes will be arguably supportive for markets, even lower rate rises will go some way to addressing inflation expectation worries.

European stocks closed higher with construction and material stocks leading gains. Oil was down by 11% this week – if prices remain steady over the coming weeks it could be the first quarterly back-to-back decline.

Next week we have: UK industrial production, UK employment data (claimant count, unemployment rate & employment change) and the UK inflation rate. We also have US and Chinese retail sales, Chinese industrial production and UK consumer confidence. Investors also await the interest rate decisions from the Fed on the 14 December and the ECB and the Bank of England on the 15 December.

Investment Management Team

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