There was no sign of a Christmas slowdown in investment markets this week as we saw new inflation data and interest rate decisions from many of the world’s largest economies.
On the inflation data front in both the US and the UK, it was encouraging news. Following the fall in October to 7.7% (which kickstarted support in equity markets), November saw a further decline in US inflation to 7.1%. In the UK, whilst the numbers are bigger, the same trend can be found as inflation fell from an eyewatering 11.1% to 10.7% in the year to November.
Armed with this new data, all eyes were on the central banks to see their response. Although I am sure the respective committees were not colluding, the Federal Reserve (Fed), Bank of England, and European Central Bank all decided to continue tightening monetary policy by raising interest rates by a further 0.5%.
Initial market reaction to the news was fairly muted, as the moves higher and size of the interest rate increases were well-telegraphed in the weeks running up to the meetings. The focus was really on the press conferences that followed.
Whilst I would imagine that Fed Chair, Jay Powell, was privately very pleased/relieved by the inflation data, publicly he was keen to stress that further work will be required in the coming months to ensure inflation trends toward their 2% target. He remarked, “My view and my colleagues’ view is that this will take some time. It’s good to see progress, but let’s just understand we have a long way to go to get back to price stability.”
This downplaying of the latest inflation data is understandable. By raising interest rates the Fed wants to tighten conditions, the last thing Jay Powell wants to do is fire a starting gun at the markets and undo the hard work done so far this year.
With inflation coming down in October and now confirmation this has continued through November, the December/January data (due in January/February) will be key. Should that provide further confirmation of the trend, we may see Powell’s tone change in the coming meetings. If inflation continues to fall and central banks can keep interest rates steady, that environment could provide a more favourable backdrop for both equities and fixed interest assets as 2023 unfolds.
John Naylor, Chartered FCSI – Head of Investment Committee