December brings some cheer

December has begun on a positive footing for investors, with market participants choosing to focus on the positives rather than the negatives, and most equity markets now trading above bear market territory again. The release of Federal Open Markets Committee (FOMC) meeting minutes at the end of November gave investors enough reasons to buy risk assets. The minutes were in line with previous statement from Powell, but inflation data had turned less scary in the meantime. With news headlines full of stories of tech firm staff layoffs, signalling an easing of tight labour conditions, markets began to see an end to endless rate rises. Current interest rate futures have US interest rates peaking below 5% and with that peak brought forward to April next year (rather than above 5% in May/June). In other words, it is no longer premature to contemplate the Fed going easier or at least less aggressive at slowing the US economy.

The release of above-forecast US non-farm payroll data might have dealt a blow to the dovish narrative. While surrounding labour market data has shown reasonable signs of a slowdown, it is not yet feeding through to the most important US national labour market surveys. The US picked up another 263,000 employees in November, another outsized month of job growth. Meanwhile, the unemployment rate stayed the same at 3.7%. Lots of jobs being filled while the unemployment rate stays the same ought to mean more people returning to the labour market. Yet, the number of people in work or seeking work went down from 62.2% to 62.1% of the working age population.  Even worse, they worked fewer hours and the rate of growth of average hourly pay went up slightly to 5.1% year-on-year. So, it’s all very confusing, and markets were skittish as a result. But despite Friday’s volatility, markets have been experiencing more stability over the past couple of weeks, with investors less fearful to invest into risk assets. This seems like a better test of household inflation expectations than just asking people what they expect the rate of inflation to be next year: they are putting their money where their views are.

It is still not all plain sailing though, particularly with geopolitical risks lingering in the background. While China has not been the largest buyer of cheap Russian oil and gas supplies (the honours belong to India and Turkey), last week President Xi Jinping said China was willing to expand energy trade links with Russia in the future. So even if the markets present good opportunities, the political risks of investing in China will remain apparent while the Xi regime remains in place. The recent sentiment shift has been encouraging. However, it also means that market levels remain vulnerable to a whole host of factors that are fiendishly difficult to forecast – from central bank agendas and desire to reassert their credibility, to the geopolitics of China and Russia, to the level of consumer demand destruction from higher (energy) prices and interest rates that will eventually hurt corporate profits. Last week felt calm, and although we hope things stay that way, we would not bet on it.

Christmas Hours: As a reminder, our offices close Friday 23rd at 4pm until Tuesday 3rd January at 9am.

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This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.

Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.