Market Update

Following protests against lockdown measures, China took decisive steps this week to ease quarantine restrictions. They rolled out a set of 10 guidelines to facilitate reopening, which now permits home isolation. Concurrently, China's year-on-year inflation dwindled to 1.6%, mirroring predictions and marking the lowest rate since March. This decline was primarily due to decreasing food costs. On the back of these developments and the prospect of China reopening sooner than previously expected, the Hang Seng witnessed a boost. As we've consistently emphasized, the vast population of 1.4 billion in China and the consequent suppressed demand heralds immense possibilities for a surge in consumption.
Several key global central banks signaled a potential deceleration in the trajectory of interest rate increases, given the recent softening of inflation and economic growth. The market anticipates the European Central Bank, the Bank of England, and the Fed to amplify rates by 50 basis points.
In the US, producer prices, crucial for gauging inflation, registered a modest 0.3% increase in November, mirroring the prior month but slightly exceeding market predictions, thus influencing investor perceptions.
The University of Michigan's consumer sentiment index for the US surged to 59.1 from November's 56.8, outpacing the anticipated 56. Moreover, inflation forecasts for the forthcoming year dipped to 4.6%, marking the most modest rate since September 2021.
In the backdrop of this data and the impending release of the US CPI data next week, the Fed will have to strategize judiciously for their 14 December policy convention. It's imperative to recognize the lag between policy shifts and their manifestation in economic indicators. Policymakers ought to exercise caution to avert excessive inflationary measures. Thus, while a gradual pace of rate hikes might buoy markets, even modest rate adjustments can address mounting concerns about inflation expectations.
Wrapping up with European stocks, they concluded on a positive note with construction and materials leading the surge. Meanwhile, oil prices plummeted by 11% this week. Should this trend persist, we might witness the first sequential quarterly dip.