Central banks plough on with rate hikes

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. 

Major US equity indices extended their sell-offs on Thursday as a sharper-than-expected retreat in retail sales and manufacturing underscored the slowdown in the economy after the Federal Reserve doubled down on its hawkish pledges. The Dow closed 2.3% lower to 33,202, the S&P 500 tumbled 2.5% to 3,896, and the Nasdaq Composite plunged 3.2% to 10,811. Similarly, European shares also ended sharply lower as the markets digested a plethora of rate hike announcements.

Summary

• Asian equity markets fell on Friday, extending a global equity rout as investors digested a slew of economic reports in Asia, headlined by data showing December manufacturing PMI in Japan tumbled to an over two-year low. Shares in Australia, Japan, South Korea, Hong Kong and mainland China all declined. 
• European shares are on track to rise contrary to their US equity futures which edged lower in the early hours of Friday. 
• Oil prices were broadly flat on Friday and were on track to end the week more than 7% higher, as a bullish outlook for oil markets outweighed concerns about the prospect of a higher peak for interest rates and a possible global recession. 
• Advance retail sales for November were down 0.6% month-over-month (m/m) in the US, below consensus forecast of a 0.2% decrease, and compared to October’s unrevised 1.3% gain. Meanwhile, industrial production also decreased 0.2% m/m in November, following a 0.1% decrease in October and missing market expectations of a 0.1% gain as higher interest rates and prices weighed on demand. 
• The ECB raised interest rates by 50 bps yesterday, marking a fourth rate increase, following two consecutive 75 bps hikes. Policymakers also said rates are expected to rise further due to a substantial upward revision to the inflation outlook. Inflation forecasts were revised higher, with average inflation seen reaching 8.4% in 2022 before decreasing to 6.3% in 2023. On the GDP front, the Euro Area economy may contract in the current quarter and the next quarter owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. 
• The Bank of England voted by a majority of 6-3 to raise interest rate by 50 basis points to 3.5% during its December meeting. Two MPC members preferred to maintain rates unchanged and one member preferred to increase them by 75 bps to 3.75%. The central bank’s projections suggested the CPI inflation has reached its peak and is expected to remain “very high” in coming months.  
• The European Union granted Bosnia-Herzegovina the status of candidate country, a symbolic step on a path toward membership that is expected to take years. The decision is a major nod to an ethnically divided country that is still grappling with the consequences of the bloody war on its territory with the US-brokered peace accord in 1995. 
• Shares of Netflix yesterday dropped over 8% following a report from Digiday that the company has missed ad-supported viewership guarantees promised to advertisers and is having to offer some refunds. Netflix has not commented on the report.