Financial Markets Overview In December

The world economy chugged along in the third quarter (Q3) of this year but is now set to slow markedly, weighed down by weakening in the United States, euro area, and People’s Republic of China. – Asian Development Bank”

The greenback traded in volatile conditions…

Inflation expectations and speculation alongside Federal rate hikes continue to drive the greenback, with levels touching month lows mid-December before strengthening and consolidating slightly higher at the end of the festive season. Federal chair, Jerome Powell, has stated that the personal consumption expenditures price index is the Federal’s preferred inflation measure.

The Commerce department released data for November which showed this index rising 0.2 per cent month on month, suggesting that the central bank’s interest-rate hikes are helping to cool both price pressures and broader demand. Wages, however, are climbing at levels higher than the Fed’s expectations and the strong pay gains suggests that higher policy rates will be around longer.

Wages and salaries, unadjusted for prices, were up 0.5 per cent for a second month.

The University of Michigan’s consumer sentiment data reflected that consumers are more optimistic about easing price pressures, with inflation expectations dropping in December.

Additionally, the sales of new homes rose in November, suggesting some stabilization in demand as mortgage rates eased late in the month, retreating from two-decade highs.

The housing market is particularly sensitive to changes in interest rates.

Nonfarm payrolls increased 263,000 in November after an upwardly revised 284,000 gain in October with the unemployment rate holding at 3.7 per cent.

The labour force participation rate, the share of the population that is working or looking for work, eased lower to 62.1 per cent, a fourmonth low.

The Federal Reserve has reiterated its stance to battle inflation, with officials projecting policy rates could be as high as 5.1 per cent at the end of 2023.

In its December statement, the Fed had projected a slow in economic growth for 2023 with inflation remaining well above its 2 per cent target.

…and the yen surging…

Bank of Japan Governor, Haruhiko Kuroda, announced the surprise decision to widen the trading band on 10-year bond yields and triggered the biggest one-day jump in the yen not seen in over two decades.

The yen has since consolidated around six-month highs against the dollar.

The BOJ doubled the upper limit of the 10-year sovereign debt yield to approximately 0.5 per cent.

The Japanese cabinet approved a 114.4 trillion-yen (FJ$188 trillion) spending for the next fiscal year, an increase of 6.3 per cent from last year’s initial budget.

The majority of the budgeted spending is expected to be funded by tax revenue and approximately 35.6 trillion yen (FJ$0.59 trillion) of borrowing.

The country’s trade deficit narrowed slightly in November as commodity prices cooled, although the trade gap remained above two trillion yen for a fourth consecutive month.

Imports increased year on year by 30.3 per cent, while exports gained 20 per cent, led by cars, construction, and mining machinery.

…with the euro and at three-month highs…

The euro posted gains as the European Central Bank ramped up rate hike expectations.

The ECB increased interest rates by 50 basis points, a slower lift in comparison to previous 75 basis point hikes, bringing the key rate to two per cent.

ECB President Christine Lagarde has made statements warning investors to prepare for more rate increases as the central bank moves to quell the worst inflation in the history of the euro.

Officials have also outlined plans for quantitative tightening in 2023, an effort to offload past government debt stimulus purchases.

Euro zone consumer prices posted the first slowdown in over a year last month, declining to 10.1 per cent last month from a record 10.6 per cent, but are still seen averaging 3.4 per cent in 2024 and 2.3 per cent in 2025.

The ECB’s target is two per cent. The pound surged against the dollar in the final months of 2022, placing it on track for its best performing quarter since 2009.

The stronger pound comes days after the Bank of England delivered an expected half point hike, bringing its key policy rate to 3.5 per cent.

This is the highest level since 2008.

UK wages rose 6.1 per cent, a record pace that is expected to maintain pressure on the central bank. Wages are still rising more slowly than inflation, reducing the spending power of United Kingdom workers, and fueling the calls from unions for bigger wage increases.

sterling

A consumer survey conducted by the BOE noted British consumers expected inflation to be above the central bank’s two per cent target. Most were dissatisfied with the central bank’s handling of inflation and monetary policy.

United Kingdom retail sales fell in November deepening concerns of an inflation crises and higher costs of living and, underscoring unease that the UK is already in a recession, as indicated by the BOE. Additionally, the BOE believe that GDP set to register a second consecutive quarter of contraction in the final quarter of 2022.

…and the Australian and New Zealand dollars strengthening…

The Reserve Bank of Australia lifted the cash rate by 0.25 per cent in its December meeting with the governor stating that the board expects to increase rates in the future.

Data out earlier this month noted that the Australian economy expanded by 0.6 per cent in the third quarter with annual growth at 5.9 per cent.

The current account, however, slipped into deficit in Q3.

The Australian dollar has been boosted by weakness in the greenback and is expected to end the month on a high.

The New Zealand economy surged forward and posted a two per cent lift in the September quarter GDP, with levels above end of 2019 numbers.

With supply chains still constrained, the RBNZ is expected to continue rate hikes in 2023.

The Reserve Bank of New Zealand hiked by a record 75 basis points toward the end of November, stepping up its fight against inflation. The December index of consumer confidence fell to a record low of 73.8 from 80.7 in November, mirroring a slump in business sentiment. Buoyed by the easing of Covid curbs in China and speculation that US rates are nearing their peak, the kiwi has climbed from October lows.

…and key commodities set to close

the year on a high

Oil prices continued to trade below US$90 (FJ$198) even as traders weighed on China’s demand outlook on the back of an uplift in Covid restrictions.

Winter storms in the US and the European Union agreement on a price cap on Russian oil also weighed on trading prices.

Russia has said it aims to ban oil sales from February 1 to countries that are abiding to the G7 price cap that was imposed on December 5.

Declining US stockpiles could play a part in pushing spot oil prices higher.

Gold touched a six month high later in December as investors remained optimistic about China’s ease in restrictions.

China’s tech industry is a top consumer of gold.

Gold has gained nearly $200 after falling to a two-year low in late September, as expectations about slower interest rate hikes from the Fed dimmed the dollar’s appeal and lowered the opportunity cost of holding bullion, which pays no interest.

A United Nations gauge of global food prices fell for an eighth straight month in November to 0.1 per cent, the lowest since January. The renewal of Ukraine’s grainexport deal saw wheat and corn prices lower, while the prospect of a global recession notes a curb in food demand.

Obstacles remain to getting Ukraine’s grain out despite the extension of the deal, and elsewhere high energy prices are pushing some food companies to cut staff.