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Market commentary

The end of November saw a further rally in bond and equity markets, in response to comments from US Federal Reserve (Fed) to signal the possible start of a slowing pace of interest rate rises in the US.

8th December 2022


Inflation in October, as measured by Consumer Price Inflation (CPI) was higher than expected and reached a new high for 2022 of 11.1% in October.

The energy price increase of 27% from September had been expected after changes to the energy price cap. Food price increases were a lot greater than expected as was the core inflation figure of 6.5%. Core inflation strips out items that can be seasonal in nature – like food or energy costs, to give a broader direction of inflation. This was driven by higher costs for recreational and cultural pursuits. Inflationary pressures have also been caused by Covid-related supply chain problems but some of these (such as used cars) have started falling in price again.

This might well be the peak level for headline inflation, but as is the case in the US, it will be difficult for the Bank of England to relent on its policy tightening if the core inflation rate remains elevated. Central banks around the world are looking to the past and the 1970’s in particular where early interest rate falls led to more persistent inflation through the period and they will want to avoid that.


Eurozone inflation in October also reached a record high at 10.6%. The European Central Bank’s (ECB) have indicated that they need to remain strong against inflation but because of the statement, markets have started to price the probability of a 0.5% increase in interest rates in December rather than the 0.75% rate hike previously predicted.

Mild October weather has alleviated some of the concerns about energy shortages through the winter. This allowed gas storage facilities to remain unused and increased confidence that the Continent will be able to operate relatively normally during this winter.


The main event for economic commentators in November was the US inflation data for October. This showed prices rising at an annual rate of 7.7%, down from September’s figure of 8.2% and below market expectations.

Release of this number caused a one-day rise of 5.5% for the S&P500 – the main US stock market Index. It is not all cause for celebration, the Fed continues to say it will be tough on inflation and interest rates will remain high for longer than people expect to avoid new inflationary pressures. This promise of higher rates brings with it greater chance of recession, and that, in turn, would put downward pressure on company earnings and therefore share prices.

The US mid-term elections also took place in November. The Democrats retained control of the Senate and lost the House of Representatives but a threatened ‘Red Wave’ of republican support did not materialise and this was seen as a positive result for Democrats. A split Congress provides little threat or opportunity as far as investors are concerned but some of the concerns for the future, not least the return of Donald Trump, are seen to be lessened.

Emerging markets

China was in the news again in November with the protests against President Xi and his zero-Covid policy. The initial catalyst for protests was a fire in an apartment building where the deaths of residents were blamed, at least in part, on Covid restrictions which both stopped people leaving the building and the fire services from tackling it. Negative sentiment in the country has been exacerbated by broadcast pictures from the World Cup showing massed crowds enjoying the football without masks or other restrictions.

With such a huge population, vaccination rates have been slow, in particular for the more vulnerable members of society. There has been talk of the president softening Covid policy but this seems difficult in light of record Covid cases and a culture where changing one’s view often represents an irredeemable ’loss of face’.

Alongside this challenge, the relationship between China and the rest of the world remains strained. Security concerns have led to restrictions on Chinese equipment. In the UK, Whitehall departments are banning Chinese-made surveillance equipment on sensitive sites owing to perceived security risks and several Chinese telecoms equipment companies have been banned by the US regulator from selling their wares in the US. In China, Tesla vehicles are reportedly being banned from military areas, and military staff and employees of certain state-owned companies are not allowed to use Teslas either.

Defensive assets

2022 has been challenging for fixed-income investments such as the bonds we use in portfolios to cushion the movements of volatile equity markets.

At the end of last year, the market was expecting the Bank of England’s base rate to end the year at around 0.50%. By November, the bank raised interest rates for the eighth successive time to 3%. At its November meeting, the Bank laid out two scenarios. One where rates rose to the 5.25% expected by the market (in the wake of the fated ‘mini-budget’), in which the Bank forecasts a two-year recession. In the other scenario, interest rates stayed around the new rate of 3% and the Bank forecasts only just over a year of recession. Interestingly, in both cases, inflation is forecast to fall below its 2% target which may signal the ‘pivot’ to slow or end interest rate rises may be near.

With the possibility of interest rate rises slowing down it has been positive for defensive assets and we have seen increases through November for both the Short-Dated Bond and Index-Linked Gilt funds. Over the course of the year, the Short-Dated Bond fund, which is the largest holding in the defensive part of portfolios, has fallen 7% but this is much less than many other bond funds. The Index-Linked Gilt fund has fallen by just over 30% over the year, but has a smaller percentage – 5 or 10% in portfolios. While any fall is disappointing both these funds are positioned well for the future – the Short-Dated Bond with a 4% yield and the prospects of inflation linked returns for the Index- Linked Gilts.

Please speak to your Old Mill financial planner if you want to discuss your portfolio.