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Market wrap-up - December 21, 2022

These updates usually go out on Mondays but we wanted to wait for the BOJ before wrapping up the year as this will be the last market update of 2022. Christmas is coming and things will settle down for a bit but before we get there, Central Bankers seemed to be willing to keep us on our toes until the very end.

We expected last week to be an interesting one but I have to admit most of us still got caught by surprise. Equity markets dropped, bond yields went up and most cryptos dipped as hawkish actions and comments hit the wires.

We started last Tuesday with the CPI, the main measure of inflation, which came out a touch lower than the previous one, as expected. Several components of the CPI basket showed that inflation is moving in the right direction, indicating that the restrictive monetary policy is starting to show positive results. So far, so good.

But on the next day, Jerome Powell gave the first punch but TradFi and crypto markets, not by raising rates more aggressively than anticipated (+50bps “only”), but by saying that the tight monetary policy would stay for longer than we thought. He also pointed at a slightly higher terminal rate a 5.10% by year end, while the market expected a peak at 4.87% in March. Since he made that comment, global equities lost more than 2% and bitcoin fell by 7%, dragged down by the general risk-off mode.

Then the rest of the world followed suit and kept hitting an already beaten-down market.

In Europe, the ECB moved rates up by 50bps too, so did and the Bank of England by 50bps, the Norges Bank by 25bps.

In Asia, Hong Kong Monetary Authority hiked by 50bps and even Japan acted earlier than expected on the rate curve yesterday. One could think it was a concerted action from Central Bankers around the world…

Europe even went one step further and announced that a target rate at 3% in 2023 would not be enough and that 4% would probably be more appropriate to keep inflation under control, signaling more hikes than anticipated. EUR bonds dropped further and EURUSD gained ground on the news.

Policy makers made it clear that their focus moved from supporting growth to fighting inflation at all costs and this end of year might well be the starting point of a paradigm shift. From now on, what is bad for the economy will be bad for the market sentiment as there should be no more assumption that Central Bankers will rescue the economy every time it faces headwinds.

2023 will probably be more volatile than most people think, at least the first half of the year.

Luckily, the rest of this week should be quiet as we get closer to the end of the year. It has been an eventful year to say the least, so let’s all take the opportunity to rest and enjoy our loved ones. We’ll be back on the 9th of Jan. Merry Christmas to all!

Johan Thomyris

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