Central banks have played Grinch this Christmas

Major indexes turn lower in December
Japanese central bank surprises the markets, others stay hawkish
Inflation subdued even further, while macro challenges remain

The year-end rally has not materialized in the major stock markets around the globe, as investors have been assessing the policy updates from the leading global central banks. Global gauge of the developed markets companies’ stock prices – MSCI World Index – turned negative, falling 4,2% in December. In the meantime, MSCI Emerging Markets index, which captures the stock price changes of the companies in the developing markets, dropped by 1.6% .

FED slowing down

As we’ve been noticing throughout the remarkable year of 2022, the primary focus during December has stayed on the inflation and the central bank limbo. The Federal Reserve (US Central bank) has raised the interest rates once again during its meeting in December. The slight change of tone in numeric decision (0,50% increase) has somewhat contrasted with the comments by the central bank’s statement and the policymakers’ projections on the peak interest rate level for the next year.

ECB on track to further hikes

On the other side of the Atlantic, ECB raised the interest rates (as expected in our December newsletter) by 0.50 %. Financial markets took a lower turn after the Head of ECB, Christine Lagarde, shared her anticipation of another 50 basis-point rise at the next meeting on Feb 2 "and possibly at the one after that, and possibly thereafter". Naturally, some investors have been caught off-guard by the strictness in tone and that has spelled the correction in the European assets and once again rising yields.

Japan central bank surprising the markets

However, arguably the largest surprise came from Japanese Central Bank (JCB), which caught investors completely off-guard by announcing its decision to widen the accepted channel for the yields on the 10-year bonds when implementing its monetary policy. Contrary to the assurances from the JCB itself, market participants have read the decision as a sign of pivot away from multi-year long ultra-dovish monetary policy. As a result, Japanese yen jumped by 4% versus US Dollar for the day, while Japan’s Topix equity index dropped by 1,5%, as investors regarded that as yet another chapter in the global tightening cycle.

Inflation subdued, macro challenges remain

On a positive side, the inflation figures have been trending down across the developed markets. While that may herald some inspiration to the financial market participants, it is obvious that the elevated inflation rates are going to haunt the global economy for the foreseeable future. With some macroeconomic news still rolling in a rather resilient mode (see the “Change in Nonfarm payrolls” data in the US, below), it is likely that some investors will be reading positive macro news as market-negative, as it may draw additional action by the central banks in 2023.

Change in Nonfarm Payrolls in the US, '000

Source: Bloomberg L.P.

“House view” update

The neutral risk allocation budget, which was re-stated in November, was left intact in December. With the tightening cycle and the 2022-prevalent trends still in strong mode, we remain constructive on the defensive sectors, holding the tactical exposure to utilities, energy, and consumer staples.

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