Investors overestimate risks as US Fed signals higher final rate hike

The main points of the speech of the US Federal Reserve Chairman Jerome Powell:

• There is a commitment to return inflation to the 2% target to ensure price stability, which is key to economic stability.
• Rate hikes will slow in 2023. The Fed’s rate guidance is projected to reach 5.00%-5.25%, but everything will depend on incoming economic data.
• No rate cut is currently projected for 2023
• The labor market and price stability (mainly in food, housing, and transportation) are the key factors for the decision to raise the rate.
• Inflation data for October and November 2022 showed visible progress, but more certainty is needed that it is controlled, so the monetary policy remains constrained.
• The reduction in assets in Treasury securities will continue.
• The labor market is extremely strong. The expected unemployment rate as a result of restraining monetary policy could reach 4.5% versus 3.7% at the moment.

The ECB will hold its monetary policy meeting today. Analysts expect the ECB to raise the interest rate by 0.5%. The main focus of investors will be the speech of ECB head Christine Lagarde, as well as the ECB’s decision on quantitative tightening (QT).

Yesterday, the Bank of England released its Financial Stability Report, warning that 2023 will be a difficult year for British households due to a combination of falling real incomes, rising mortgage costs, and rising unemployment. After Monday’s positive GDP data, UK Chancellor Jeremy Hunt warned that the economy could worsen before getting better. While yesterday’s employment data was mostly positive, it did indicate a slowdown in hiring as businesses prepare for a tough start to 2023. Wage growth (year-over-year) peaked, adding to the challenge for the Bank of England as it tries to balance recession fears with rising costs of living. The Bank of England (BoE) will meet today with the market consensus for a 50 basis point increase.

Oil prices fell slightly yesterday due to a stronger dollar, and the possibility of further interest rate hikes by global central banks also added to concerns about demand for “black gold.” On the other hand, the restriction by the G7 countries and allies on Russian oil prices will be a restraining factor for the growth.

Asian markets were mostly on the rise yesterday. Japan Nikkei 225 (JP225) gained 0.72%, China FTSE China A50 (CHA50) jumped by 0.93%, Hong Kong Hang Seng (HK50) increased by 0.39% on the day, India NIFTY 50 (IND50) added 0.28%, and Australia S&P/ASX 200 (AU200) gained 0.68% on the day.

Chinese economic data for November was much lower than expected. The world’s second-largest economy lost even more momentum as factory output slowed, and retail sales continued to decline amid a rise in COVID-19 cases.

Japan’s exports rose by 20% in November from a year earlier, but imports outpaced shipments, leading to a 16th consecutive month of trade deficits, Ministry of Finance (MOF) data showed Thursday. As a result, the trade balance came in at a deficit of 2.03 trillion yen ($15.00 billion), compared with an average estimate of a deficit of 1.68 trillion yen.