Just what is driving global stock-markets in 2022?
A stuttering start to the year, based on fears around economic growth and rising energy prices, was followed by the Ukraine war induced decline into early March. Markets then rallied from about St. Patrick’s day to the end of March only to fall more substantially by about 20% on renewed and indeed reasonable inflation fears. This was the bear market many feared.
But stock-markets staged a strong recovery from mid-June to late August. Earnings season came and went with little market response, as previously reduced company earnings forecasts were easily met. Also most economic forecasts were being downgraded – so there was little positive for stock markets in that.
The strong Summer rally was really facilitated by comments from the US Central Bank that interest rates might not be that far off neutral, and markets took heart that future rate hikes could be more modest.
But now the S&P index has lost over 7% from its recent high.
What is driving financial markets today?
—– Central Banks.
This last market fall can be traced to the comments of the US Federal Reserve Chair Jerome Powell who at the Jackson Hole symposium called for “forceful action to restore price stability”. This torpedoed any market confidence that US rate increases might moderate. Any improvement or stabilisation of inflation rates we have seen, falls far short of where the Central Bank wants to get to. The prospect of a further 0.75% increase in September was left firmly on the table.
In what was really a call to arms for Central Banks around the world, Jerome Powell said the responsibility to crush inflation was unconditional. He affirmed that the US Central Bank won’t stop until the job is done.
This was a more “hawkish” tone than the market had been expecting. Some commentators took too much comfort from mid-summer inflation statistics that showed headline numbers falling back as food and energy (both highly volatile) declined from higher levels earlier in the year. But Central Bankers look more at core inflation and inflation expectations. The issue here is that core inflation can be quite sticky. Some of its principal components include rents and services where prices, once higher, can be difficult to peg back. This requires a vigilant Central Bank and points to an interest rate profile that may be less market-friendly.
Will other Central Banks heed the call of the US to recognise unconditionally the need to be forceful in tackling price inflation?
The ECB is next up to take a swing with the interest rate bat. While the language and imagery from the Federal Reserve has shifted up substantially as we have seen, the forward guidance from the ECB is still, to a degree, “Emm….”
ECB Chief Economist Philip Lane favours a gradual step by step, meeting by meeting, approach and typically smaller increments when it comes to upping rates. In fairness, this was also his view prior to the last hike which proved wide of the mark.
However many of the heavy hitters on the council – such as Schnabel, Muller and Knot – are looking at rampant inflation and calling for more dramatic rate hikes – some for a 0.75% increase, similar to the US.
Communication from the ECB continues to be less than clear, and this further increases the market nervousness in what will be an uncertain regime of rising interest rates anyway.
Central bank policy has been at the centre of what’s driving global stock markets in this latter part of 2022.
Even though we may see bigger instalments of hikes than a typical cycle, it may still be quite a drawn-out reversal in inflation. Core inflation has a tendency to be more “sticky” and if Jay Powell’s vow to “keep at it until the job is done” holds up, interest rate levels and policy will continue to be significant market drivers for some time to come and markets will be wary of any Central Bank errors.
Jerome Powell and his Federal Reserve say they are braced for more pain – but is the US economy?
Tradewinds 