In early December, the Reserve Bank of Australia (RBA) made a 0.25% bump to the cash rate, taking it up to 3.1%. Although they quickly pointed out that monetary policy wouldn't be on an autopilot system in the future, they also suggested further increases in interest rates over time based on the labour market and inflation developments as data becomes available.
As the likelihood of a 0.50% rise in the US cash rate loomed, Australian yields declined initially. Still, when the decision was confirmed and accompanied by a hawkish statement from the Federal Reserve, this caused a reversal in yield trajectories. Subsequently, just before Christmas, these trends accelerated as an unexpected change to the Bank of Japan's Yield Curve Control occurred.
At the start of the month, the AU3Y government bond yield dipped to 3.02%, ending 34 basis points higher at 3.50%. At the longer end, the AU10Y and AU30Y yields took a tumble down to 3.31% and 3.58%, respectively, before climbing back to close the month at 4.06% and 4.35%.
According to recent Australian economic data, the 0.6% GDP reading over the September quarter indicates that activity-based measures are still strong but have begun to moderate before year's end. The NAB Business Survey in November showed a decrease in business conditions yet remained above average despite declining forward orders and confidence.
The jobs market in Australia is as strong as ever, with employment rising by 64,000 in November, exceeding expectations. The participation rate of 66.8% has returned to its historical high, and the unemployment rate remains stable at 3.4%. Despite these positive indicators, consumer sentiment continues to suffer due to increasing living costs and tightening monetary policies.
Volatility crept back into the short-term bank bill yields as markets reevaluated their expectations for monetary policy. As a result, rates across three and six-month bank bills traded higher by 17.5bps and 20.5bps, respectively, concluding the month with 3.27% and 3.78%. Markets anticipate that interest rates will reach an apex of 4% close to late 2023 during this tightening cycle.
December 2022 Summary
- Global stock markets posted the worst performance since 2008
- The US Fed has raised rates by 4.25% compared to the 0.75% expectation at the start of 2022
- The Value sector outperformed Growth by the second-biggest margin since 1979
- Inflation and employment levels remain elevated
- PMIs and housing data are in a sharp decline
As 2022 drew to close, global markets were trying to recover from the pandemic while juggling an array of economic and geopolitical obstacles. Inflation skyrocketed due to extreme fiscal and monetary policies, supply chain problems, changing consumer habits towards goods consumption instead of services', high employment numbers along with wage increases, Russia's war against Ukraine and China's zero-covid rulebook.
Faced with persistent inflationary pressures, a host of global central banks undertook one of the most aggressive tightening cycles in recent history. 2022 saw 80 central banks around the globe increase interest rates - 15 out of these being amongst the top 20 most influential for worldwide markets. The Federal Reserve's interest rate soared by 425bps over its last 7 meetings; equating to seventeen 25bp hikes when earlier in 2022 investors had only expected three such increases.
Equity benchmarks in the US (INDU, SPX, NDX, RTY & MID) experienced their poorest annual performance since 2008 with consecutive losses registered over all quarters of the year. The Dow was a noteworthy exception to this pattern because it is uniquely weighted by price and has more value-style members than other indexes. The Nasdaq Composite and Nasdaq 100 underperformed, largely due to their heavily weighted mega-cap growth stocks that were severely affected by the sudden spike in rates.
After an incredible year of double-digit gains in 2021, only two out of the eleven industry sectors finished above par. Energy blazed past with a return of 65.4%, following its leading 54.4% gain from last year; Utilities, Staples and Healthcare posted near flat returns while Communications, Consumer Discretionary and Technology lagged.
The Months Ahead
Despite the unpredictability of 2022, when central banks tightened monetary policies much faster than anticipated, this year likely proves to be just as difficult for strategists and analysts attempting to forecast economic activity, corporate earnings, and asset prices. 2023 could easily follow suit.
The prediction from both markets and the Fed that the peak terminal rate this cycle is about 25bps away, futures are currently indicating a potential decrease in interest rates by late US summer. Conversely, dot plots from the FOMC imply an increase of these same levels all through 2023. The Fed's estimation of 0.5% GDP growth forecast for 2023 is as close to hinting at an upcoming recession as they get.
As China confronts the onslaught of Covid cases in 2023, it has become a huge uncertainty for many. Predicting what lies ahead for the USD is a problem, leading to conflicting global forex trends across markets. Yet if we consider the "peak inflation" or "peak tightening" and further bearish signals on the US recession ahead, emerging markets deserve greater attention as they begin to look increasingly attractive or at least worth considering in the month's ahead.