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Banking & finance
OpinionComment
Sylvia Sheng
Sylvia Sheng

Macroscope | For markets in 2023, much hinges on how quickly inflation recedes

  • Inflation is cooling but remains above central banks’ targets, which suggests room for interest rates to rise further, putting pressure on markets amid a global slump
  • Equity markets will continue to struggle, but as we near the end of the tightening cycle, support for government bonds will grow

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US shoppers walk along 5th Avenue on Black Friday in New York on November 25. The country added 263,000 jobs in November amid the surging rate increases by the Federal Reserve. With the American labour market still tight, risks to inflation remain high. Photo: Bloomberg
Sylvia Sheng

For financial markets, 2022 was a very challenging year that many investors would prefer to forget. Global equities had their worst annual performance since 2008 with the MSCI All Country World Index down by 18 per cent.

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It was also a bad year for government bonds after a multi-decade bull run. US bonds suffered their steepest losses in nominal terms in over 50 years. The biggest driver of all the market turmoil was a much-higher-than-expected inflation, which triggered the fastest interest rate increases by major central banks in a generation.

Some of 2022’s challenges are likely to linger into the early months of 2023 with inflation still elevated and the global growth outlook subdued.

Inflation seems to have peaked in the United States and is peaking in Europe, and these rates are likely to fall over the course of the year. The key question for central banks is how fast inflation will come down.

In the US, much of the inflation outlook hinges on three main drivers. The first is goods prices outside the food and energy sectors, which have begun edging down. With improving supply chain operations, goods prices, which remain high compared to pre-pandemic levels, are expected to ease further.

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The second driver is shelter inflation, which includes both rent and utility payments. Private-sector sources show that rental rates on new leases have begun falling. But the consumer price index measures the whole outstanding stock of leases and marginal changes, so even though the direction of travel seems to be lower shelter inflation, it will take time to show up in the official inflation rate.

Shoppers at Costco in Monterey Park, California, on November 22. In the US, goods prices outside the food and energy sectors have begun edging down. Photo: AFP
Shoppers at Costco in Monterey Park, California, on November 22. In the US, goods prices outside the food and energy sectors have begun edging down. Photo: AFP
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