Global equities rally after Fed hints at rate hike slowdown

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities reversed course and finished the mid-week session with solid gains in the wake of remarks from Fed Chairman Jerome Powell at a gathering at the Brookings Institution in Washington. The Chairman reiterated the Fed’s plan to “stay the course” with its rate-hike campaign but noted that smaller increases were likely ahead, as soon as next month’s meeting. The Dow Jones Industrial Average jumped 2.2%, the S&P 500 Index climbed 3.1%, and the Nasdaq Composite soared 4.4% in heavy volume. The markets were solidly higher for the month of November, as the DJIA gained 5.7%, the S&P 500 increased 5.4%, and the Nasdaq Composite advanced 4.4%. Elsewhere, European equity markets also rose on Wednesday after preliminary figures showed inflation in the Euro Area slowed for the first time since June of 2021, providing hopes the ECB may deliver a smaller interest rate hike in December.

Summary

• Asian equity markets rose on Thursday as investors cheered China’s seemingly softening stance on Covid. Moreover, investors digested a raft of economic data in the region, with manufacturing PMIS in Asian countries largely remaining contractionary. Shares in Hong Kong and mainland China led the advance, while Australian, Japanese and South Korean shares also posted strong gains. 
• European shares are set to join a global equity rally after the Fed hinted at smaller rate hikes ahead. 
• Oil prices held their recent advance on Thursday, underpinned by supply-side uncertainties and hopes for a demand recovery in top crude import China. Official data showed that US crude inventories slumped by nearly 13 million barrels in the week ended 25^th November, falling the most since June 2019 and compared with market expectations of a smaller 2.758-million-barrel decrease. 
• Chair Jerome Powell signalled the Federal Reserve will slow the pace of interest-rate increases in December, while stressing borrowing costs will need to keep rising and remain restrictive for some time to beat inflation. His comments in a speech Wednesday at the Brookings Institution in Washington likely cement expectations for the Fed to raise interest rates by 50 basis points when they meet between the 13^th and 14^th December. Market pricing now indicates that the Fed funds rate will peak below 5% in May 2023. 
• The Fed’s Beige Book regional economic survey, released yesterday, showed the US economy grew only slightly through late November, with businesses reporting that high inflation and rising interest rates clouded their view of the economic outlook. 
• The ADP Employment Change Report in the US yesterday showed private sector payrolls rose by 127,000 jobs in November, below forecasts calling for a 200,000 gain, while the prior month’s figure was unrevised at a 239,000 increase. The report, which does not include government hiring and firing, comes ahead of Friday’s broader November nonfarm payroll release, expected to show headline employment rose by 200,000 while the unemployment rate is forecasted to remain at 3.7%. 
• The second look (of three) at Q3 Gross Domestic Product in the US showed a 2.9% quarter-over-quarter annualised rate of contraction, versus estimates of 2.8% growth after the first report of a 2.6% increase. Personal consumption rose 1.7%, above estimates of a 1.6% gain, and higher than the prior reading of a 1.4% growth rate. 
• The annual inflation rate in the Euro Area eased to 10% in November from a record high of 10.6% in October, and compared to market forecasts of 10.4%, preliminary estimates showed. The cost of both energy and services likely slowed while prices of food, alcohol and tobacco rose at a faster pace. Compared to the previous month, the CPI edged 0.1% lower, the first decline since July last year. 
• China will allow some virus-infected people to isolate at home, starting with residents of its most-populous district, in a significant shift to a policy that has seen everyone with Covid sent to government quarantine sites regardless of severity to halt transmission chains. Earlier, China’s top official in charge of the fight against Covid-19 said the country’s efforts to combat the virus are entering a new phase with the omicron variant weakening and more Chinese getting vaccinated.   
• Twitter owner Elon Musk said he went to Apple’s headquarters and met with Apple CEO Tim Cook in tweets on Wednesday. The meeting marks a significant de-escalation days after Musk went on a tweet storm accusing Apple of threatening to pull the Twitter app from the App Store. “Among other things, we resolved the misunderstanding about Twitter potentially being removed from the App Store,” Musk tweeted.