Higher interest rates on the horizon

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Global Market Review

A positive finish to 2021

Despite the spread of the Omicron variant of Covid-19, major equity markets around the world ended 2021 in positive territory, boosted by mounting hopes that the variant would prove less serious than initially feared. In the US, the Dow Jones Industrial Average Index rose by 5.4% during December and by 18.7% over 2021, reaching a new all-time high towards the end of the month.

Hawks circle in the US

As food and energy prices continued to rise, US inflation continued to surge – the rate of consumer price inflation soared to 6.8% year on year in November, representing its steepest annual increase since June 1982. Meanwhile, the  Federal Reserve announced that it intends to accelerate the winding-down of its asset purchase programme, indicating that the programme will end in mid-March. The news fuelled expectations of higher interest rates this year with ten policymakers predicting three increases in 2022, and two forecasting four increases.

Inflation continues to bite

Higher energy prices continued to stoke inflationary pressures in the eurozone, where annualised consumer price inflation rose from 4.1% in October to 4.9% in November. In comparison, the rate was -0.3% a year earlier, according to Eurostat. Nevertheless, President of the European Central Bank Christine Lagarde maintained that current inflation is temporary and is caused by “passing phenomena”. Elsewhere, economic sentiment in Germany deteriorated during December, according to the ZEW Indicator of Economic Sentiment, which fell into negative territory for the first time since June 2021 as bottlenecks in supply continued to weigh on production and retail trade. The DAX Index climbed by 5.2% in December and rose by 15.8% over 2021 as a whole.

Better times ahead for Japan?

The economic outlook for Japan has improved, according to the country’s government, which reported stronger activity as the impact of Covid-19 continues to ease. Private consumption, employment, and business confidence are picking up, although exports are “almost flat”, and headwinds remain in the form of supply-side constraints and raw material prices. Confidence amongst Japanese businesses improved in December, according to the Bank of Japan’s quarterly Tankan survey; however, Japan’s economy contracted more severely than previously calculated during the third quarter of 2021, shrinking by 3.6% rather than by 3.1%. The Nikkei 225 Index increased by 3.5% during December and by 4.9% over the year.