Will Powell pivot?

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GLOBAL financial markets delivered the proverbial match of two halves this week, with asset prices fluctuating sharply on news flow from central bank comments and the release of economic data. In sum, higher equity prices, higher bond prices (lower yields) and continued dollar weakness.

The seminal development was US Federal Reserve chairman Jerome Powell’s speech at the Brookings Institution, in which he stated that ‘the time for moderating the pace of rate increases may come as soon as the December meeting’. Powell also cautioned that monetary policy was likely to stay restrictive for some time, adding that ‘despite some promising developments, we have a long way to go in restoring price stability’.

Investors were seemingly cheering so loudly in response to the first comment that they didn’t hear the follow-up. Risk assets surged, with the Dow Jones Industrial Index (the second-oldest market average in the US), and the technology-laden Nasdaq Composite closing the session up +2.2% and +4.4% respectively. This reversed prior market weakness, placing most developed market indices higher for the week.

Ten-year yields, a key benchmark that sets the reference rate for mortgages, softened by ten basis points in the US to 3.68%, while similar moves were seen in Europe (ten-year yields down 11 basis points to 1.99%) and the UK (ten-year gilts down two basis points to 3.13%) respectively.

The market action neatly summarises the prevailing ‘Fed pivot’ narrative, the argument that Powell’s inflation-fighting campaign is working (‘peak’ inflation is now behind us), that a global recession is almost guaranteed in 2023, and therefore policy makers can step back and pause from the aggressive pace of interest-rate hikes we have seen so far this year.

Countering this is resilient economic data from pockets of the US economy, demonstrated by another strong jobs report (263,000 new jobs added in November), while the ISM survey of business activity unexpectedly accelerated to 56.5, the highest since March 2021.

The same survey also found that prices that service businesses were paying are increasing, a bad signal for inflation. It was enough to trigger market jitters, with asset prices giving back some of their previous gains.

Emerging markets (+6.18%) finally enjoyed some long-overdue out performance relative to developed markets, with the Shanghai Composite closing +5.72% on the week and Asia ex-Japan +6.18%. In part, this is being fuelled by a weaker dollar, making dollar-denominated debt held by governments and companies ‘cheaper’, as well as reducing the price of essential commodities.

Arguably the key news arrived from China, where President Xi’s determination to stick steadfastly to its disastrous zero-Covid policy has finally been addressed, with officials now prioritising vaccination of the elderly. The timing of the message was coincident with the largest and most widespread demonstration of public anger towards the CCP since the Tiananmen Square protests in 1989. This should enable market participants to focus on the positive development that a carefully managed ‘Covid easing’ will, in time, trigger a de facto opening of the economy.

Turning to the commodity complex, a coalition of oil-producing nations led by Saudi Arabia and Russia on Sunday opted against trying to stop the slide with cuts to the world’s oil supply.

The welcome decision to keep production steady came at a virtual meeting of the Organisation of the Petroleum Exporting Countries and its partners, called OPEC Plus. The news came as a relief after the group unleashed a diplomatic firestorm at its last meeting in October when it agreed to cut output by two million barrels per day.

Against the backdrop of internal OPEC Plus deliberations, this weekend was an agreement reached on Friday by Ukraine’s allies to impose a cap on the price of Russian oil. The cap, set by the Group of Seven nations and Australia at $60 per barrel, is designed to keep Russian oil flowing into some global markets but limit the profits the Kremlin can make to fund its war machine.

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