Market Update

While last week's spotlight was on the US Fed and its assertive stance on interest rates, this week's focus shifted to the BoE and ECB.
Clearly, the US Fed isn't the only institution recalibrating its view on inflation. In the UK, the BoE ramped up interest rates by 0.25% to 0.5%. Meanwhile, the European Central Bank highlighted increasing risks in the inflation trajectory, causing financial markets to immediately adjust expectations for heightened Eurozone interest rates within the year.
What's perplexing, however, is the BoE's sudden shift in stance. Just last November, they seemed hesitant about raising UK interest rates, but not only have they since then hiked rates in two successive meetings, but a sizable chunk of the policymakers even advocated for a more aggressive rate hike this week. Such a drastic pivot strongly indicates a potential rate hike in their next meeting on 17 March 2022 and could potentially sway the Fed to initiate their rate adjustments with a 0.5% boost when they convene on 16 March 2022.
Given these explicit signals from major central banks worldwide, financial markets have quickly adjusted their forecasts. For instance, UK interest rates are now projected to ascend to 1.5% by September. Concurrently, the Fed is anticipated to roll out five hikes throughout the year, kicking off with a 0.5% surge in March.
Though the current inflation surge might warrant some rate hikes, we believe that the market's current predictions are not just aggressive but border on the extreme.
As we've often emphasized, much of the prevailing inflation can be attributed to transient factors, like surging energy prices and COVID-induced supply chain challenges, which are beyond the control of central banks.
Moreover, economic momentum is showing signs of deceleration. Elevated energy costs are gradually depleting disposable incomes, considering consumer spending constitutes a substantial portion of both UK and US economies.
And while the media's attention may have shifted, the ongoing pandemic persists in affecting global supply chains, hampering both economic growth and inflation.
Thus, we foresee a resurgence of 'Goldilocks' conditions where central banks may need to moderate their interest rate ambitions, culminating in historically lower peak rates, favorable for global equities.
That said, our upbeat market prognosis doesn't signify unchecked optimism. We remain acutely aware of lurking risks, primarily the escalating tensions in Ukraine.
In the upcoming week, the primary focal point will be the US CPI inflation data for January, which might influence the Fed's decision regarding a 0.25% or 0.50% rate hike in March. Other significant data releases include the UK's Q4 GDP, UK industrial output, Chinese PMI, and the University of Michigan's consumer sentiment index.