Sweet and Sour

HIGHLIGHTS:

• Global stocks have recouped losses over the past several weeks, with the S&P 500 rising almost 11 percent.
• China remains somewhat sour for investors as protests over COVID-19 restrictions occur throughout the country, with crude oil prices falling.
• Fed Chair Jerome Powell spoke in Washington today, confirming the Fed will continue to fight inflation into 2023.
• Futures data show markets are pricing in a 50 basis point hike in December and an additional one or two hikes in the first few months of next year.

Financial markets may be ending the year on a sweeter note. Global stock markets primarily climbed higher over the past several weeks, with the S&P 500 rising almost 11 percent and international developed markets rallying over 16 percent. This is a welcome change, as most financial assets have slid lower during 2022 amid economic concerns and higher interest rates. Even bond markets—which had fallen alongside stocks due to a surge in rates—have somewhat recovered. The Bloomberg US Universal Bond Index returned 3.4 percent over the same period. However, one area that has stayed a bit sour and remains a concern for investors is China.

Troubles ranging from sizable financial disputes in the country’s real estate sector to zero-COVID policy have weighed on China’s economy and financial markets this year. More recently, historic protests have bubbled up throughout the nation as citizens become frustrated with COVID-19 lockdowns and constant mass-testing campaigns. Today, workers at Foxconn Technology—the main iPhone plant in China—reportedly clashed with security as tensions heightened over tough restrictions. The protests could be the most significant outcries of social unrest in China since the Tiananmen crisis over 30 years ago and mark a challenge for President Xi Jinping’s third term. The instability led to volatility in Chinese shares, and Brent crude oil prices fell to $83 per barrel as of yesterday.

At a speech in Washington today, Fed Chair Jerome Powell confirmed that the Federal Reserve’s fight against inflation would run into 2023, but signaled a downshift in the pace of hikes. Investors had initially predicted a hawkish surprise was more likely, however, now the main question is how long officials will need to hold rates at peak levels. The comments all but cemented a 50 basis point hike at this year’s final meeting in December, which is corroborated by investor bets in fed funds futures. The data also show another one or two quarter-point moves in early 2023 to cap off this series of hikes. Officials have indicated a more stable path for rates next year, but inflation and the employment picture will likely control that outcome.

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