Lesser Spotted Doves Sighted in Federal Reserve

Eagerly anticipated and released last week, minutes from the Federal Reserve’s (Fed) November meeting showed a substantial majority of officials agreed on reducing the level of interest rate hikes moving forward, following a cooler-than-projected inflation reading (7.7% YoY vs a prediction of 8% YoY) for October and four successive ‘jumbo’ increases of 75bps.

Attention seems to have turned from the size of monthly increases to the final level and how rates will be managed thereafter. Overall, a positive update.

US Rates. 2007 – present day

Source: Bloomberg

Despite the narrative from Central Banks, it’s not a given that inflation will return to near the 2% target any time soon. Of course, we don’t expect it to remain at today’s eye-watering levels forever, but for the time being, targeting 2% could be viewed as quite optimistic. Some factors (rents, wages) will prove stubborn to bring down.

I’ve added a graph below-detailing historic price changes for sticky vs. flexible CPI components. Hopefully, this demonstrates the gradual nature of reversals to come.

Source: Federal Reserve Bank of Atlanta

?US

The S&P 500, which was closed on Thursday for Thanksgiving, posted a weekly gain of 2.02%, taking the monthly gain to just under 4%. Sentiment has been buoyed by early signs of higher interest rates beginning to take trickle down into the real economy and the relative ‘dovishness’ of Fed officials heading into the new year.

Global markets (barring an end-of-November ‘event’) are set to post two consecutive months of gains for the first time since the heady days of ‘21.?

China

Despite recent lockdown related unrest in many of China’s major cities, the overall outlook for equities has improved throughout November. The People’s Bank of China has moved to increase liquidity in the financial system by lowering thresholds for lenders' cash reserves by 25 bps and the government has released a 16-point plan to mend the distressed property sector.

We’ll be monitoring how the recent protests effect policy, if at all. President Xi has been ‘unwavering’ in his instructions to maintain a strict zero-COVID strategy, however, the CCP’s greatest concern is unified and coordinated protests, which isn’t a million miles away from what has unfolded over the weekend.

Unfortunately, China’s prolonged reluctance to adopt a foreign vaccine has put them in a position where avoiding either a substantial health crisis or economic downturn seems fairly remote at this stage.

As of Monday morning, Chinese equities dropped, and the renminbi lost ground against the dollar.

?Source: Bloomberg

Written by CJ Peatfield for Cannon Aset Management.