Global stocks retreated after major central banks raised interest rates and warned of further increases to come in the fight to tame inflation.

UK

The FTSE 100 lost 2.0% over the week.

The large-cap FTSE 100 Index is on track to outperform the mid-cap FTSE 250 Index by around 20% over 2022, helped by its high weighting to oil & gas companies as well as a drop in the pound which boosts the overseas earnings of multinational companies. This would mark the first time since 2018 that the FTSE 250 has underperformed the FTSE 100 and would be the largest degree of annual underperformance since 1986.

The Bank of England (BoE) raised rates by 50bps to 3.5%, taking them to the highest level since 2008, and warned further tightening was highly likely. BoE governor Andrew Bailey said the UK’s tight labour market and rises in wages and prices justified “a further forceful monetary policy response”.

UK inflation slowed to 10.7% in November from a 41-year high of 11.1% in October.

UK GDP grew 0.5% in October, rebounding from September’s contraction which was partly due to the extra bank holiday following the death of Queen Elizabeth II.

S&P Global’s flash UK composite purchasing managers’ index rose to 49 in December from 48.2 in November.

GfK’s measure of UK consumer confidence remained below minus 40 for the eighth month in a row in December, marking the longest period of pessimism in almost 50 years.

Private sector wage growth accelerated to 6.9% in the three months to October.

Microsoft paid £1.5 billion for a 4% stake in London Stock Exchange.

US

The S&P 500 fell 2.1% over the week while the tech-heavy Nasdaq dropped 2.7%.

The Federal Reserve (Fed) raised rates by 50bps, bringing the federal funds rate to a target range of 4.25% to 4.5%. However, Fed chair Jay Powell said: “It will take substantially more evidence to give confidence that inflation is on a sustained downward path”. The Fed’s dot-plot of future interest rate projections show that policymakers now expect the terminal fed funds rate to be 5.1% at the end of 2023, although some believe it may have to surpass 5.25%.

The annual rate of US inflation eased to 7.1% in November, down from 7.7% in October. The drop was greater than had been expected and takes the inflation rate to the lowest level since December 2021.

The S&P Global US Composite PMI fell to a two-and-a-half year low of 44.6 in December from 46.4 the previous month. Manufacturing activity fell to 46.2 in December, signalling the biggest contraction in factory activity since May 2020, while services activity slid to a four-month low of 44.4 from 46.2 in November.

US retail sales dropped 0.6% month on month in November, the biggest drop in 11 months.

Goldman Sachs said it would cut 4,000 jobs and significantly shrink its bonus pool to protect profits.

Europe

The FTSEurofirst 300 declined 3.3% over the week.

The European Central Bank (ECB) raised rates by a further 50 bps to 2%, taking them to the highest levels in 14 years. ECB president Christine Lagarde promised at least two more 50bps increases in February and March. The ECB also lifted its inflation forecast for 2022.

The ECB has now increased interest rates by 250bps during its last four meetings, marking its most aggressive set of rises since the euro was created in 1999.

Italian cabinet ministers have criticised the ECB over its aggressive monetary tightening, reflecting growing concern in Rome about the impact of higher interest rates on Italy’s finances. Italy’s 10-year bond yield closed the week at 4.34%, raising concerns over the sustainability of Italian debt levels.

The flash reading of S&P Global’s flash eurozone composite purchasing managers’ index rose to 48.8 in December from 47.8 in November, the highest level in four months and raising hopes that the downturn may be easing. German manufacturing activity in particular improved, helped by a combination of better supply conditions and reduced fears of energy constraints.

Eurozone inflation fell to 10.0% in November, from a record high of 10.6% in October.

The Swiss National Bank hiked rates by 50bps to a 14-year high of 1%.

Japan

The Nikkei 225 slid 1.3% over the week.

Japan has scrapped its pacifist post-WW2 strategy, aiming to boost military spending to 2% of GDP to tackle the challenge presented by China.

Pacific ex Japan

China is experiencing a surge in COVID-19 cases following its decision earlier this month to ease restrictions. Rising infection levels are leading to supply chain disruptions as staffing shortages threaten to close down factory production lines and truck drivers fall ill. With official testing scaled down, the country is reporting only 2,000 new cases – but unofficial estimates are that daily case numbers are closer to 40,000,000. The virus has hit big cities particularly badly – up to 40% of residents in Beijing are estimated to be infected, with widespread shortages of fever medicine and home tests.

China’s industrial production rose by a weaker-than-expected 2.2% year on year in November, compared to 5.0% in October. Retail sales fell 5.9% year on year in November, much faster than a 0.5% fall in the prior month.

New Zealand’s economy grew by 2% in the third quarter, double economists’ expectations and reinforcing the central bank’s ultra-hawkish stance to tackle inflation. Emerging Markets

Mexico’s central bank raised rates by 50bps to 10.5% and signalled another raise in the next meeting.

Indian inflation eased to an annual rate of 5.9% in November compared to 6.8% in October. This marks the first time this year that inflation has been within the Reserve Bank of India’s upper target of 6%.

Bonds

The yield on the 10-year US Treasury bond closed the week at 3.51%, a drop of 3bps over the week.

Germany’s 10-year Bund yield rose 22bps over the week to 2.15%. Meanwhile, the German yield curve inverted with the yield on the two-year German government bond rising as high as 2.5%, its highest level since 2008.

Commodities

Oil prices slipped, with Brent crude closing the week at $79 a barrel.

Russian crude oil is being shipped to India on tankers insured by western companies. It is the first sign that Russia has rolled back on its vow to block sales under the G7-imposed price cap. Under the cap introduced this month, buyers of Russian crude oil can only access western services such as insurance and broking, which are the bedrock of the global seaborne trade in oil, if they attest that they have paid less than $60 a barrel.