Home / Research / The Long and Short of it, week ending 16 December 2022

The Long and Short of it, week ending 16 December 2022

Posted: 19 December, 2022

Topic: Telecoms , Financials , Basic Materials , Energy , Industrials , Technology

Publication Type: Market Commentaries

A tale of two halves last week, separated and distinguished by the FOMC announcement half-time show. All 3 major stock market indexes moved higher nearly 2% or more through Tuesday, powered at first by anticipation of slowing inflation (Monday) and then by its confirmation with a lower(better)-than-expected CPI release (Tuesday). Interestingly, sharp gains Tuesday morning were mostly erased by the close as growing earnings/recession concerns replaced inflation concerns. As expected, the FOMC announced a 50bp rate increase (following 4 previous rates increases of 75bps) but Fed Chair Powell’s hawkish comments following the announcement largely offset any positive effects from the smaller increase. Powell stressed the battle to reduce inflation was far from over with the FOMC forecasting rates increases of another 75bps or more in 2023 but strongly caveating that forecast could change and that final effects of current and combined increases on unemployment and economic growth were, in essence, unknowable. Stock prices moved moderately lower Wednesday but then powered lower Thursday and Friday with recession and higher unemployment expectations increasing in the face of continued aggressive Fed monetary policy. The 10-year Treasury, slightly higher on Monday, moved lower the remainder of the week with falling 10-year inflation expectations. The U.S. dollar had a volatile week, weakening markedly through Wednesday and then strengthening the remainder of the week. At week’s end, the S&P 500 Index decreased 2.1% to 3,852.36, the Nasdaq Composite Index dropped 2.7% to 10,705.41, the Dow Jones Industrial Average lost 1.7% to close at 32,920.00, the 10-year U.S. Treasury rate fell 10bps to 3.49% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) was unchanged.

European stock indexes moved lower last week with the STOXX 600 Index strongly underperforming the FTSE 100 Index. Growing recessions concerns compounded by a surge of Chinese Covid cases moved indexes lower Monday while a lower-than-expected U.S. CPI releases helped move levels higher Tuesday. European stock markets paused on Wednesday as investors awaited the FOMC announcement (after the close Wednesday) and in anticipation of ECB and BoE announcements Thursday. Fed Chair Powell’s hawkish press conference comments following the FOMC announcement and ECB President Lagarde’s similarly hawkish statements – including plans to begin reducing its balance sheet in March - following the ECB’s 50bp rate increase drove the STOXX 600 Index nearly 3% lower Thursday. The as-expected BoE 50bp rate increase had a less detrimental effect on the FTSE 100 Index (down 1% Thursday) mainly due to a sharply weakening British pound resulting from increased expectations of the possibility lower rate hikes going forward. As in the U.S. the investor focus seemed to to switch from inflation concerns to slow growth/recession concerns due to rate rises past and future. Higher-than-expected UK wage growth and an unexpected decline in UK retail sales added to recession concerns while stubbornly high inflation and continued slowing business activity enforced recession concerns in the EU. At week’s end the FTSE 100 Index fell 1.9% to 7,332.12, the STOXX 600 index dropped 3.3% to 424.74, the 10-year UK government rate increased 18bps to 3.33%, the 10-year Bund rate rose 23bps to 2.15%, the British pound weakened 0.9% and the euro strengthened 0.5%, both versus the U.S. dollar.