Is inflation peaking?

Following a year of rising prices there is some evidence that inflation may be peaking. November saw headline inflation reduce in the Euro area for the first time in 17 months, but it is still at 10%.

Euro area core inflation, which strips out the more volatile food and energy components, was 5% in November – unchanged from October.

Markets Deliver another Positive Month

Following a positive October equities and bonds both went up in November providing further respite for investors in what has otherwise been a difficult year.

*As at 30.11.2022

It would be nice to think the equity markets can continue to trade up from here but as we can see in the chart below this has been a very up and down year and that volatility will likely continue.

Global Equities (local currency)

Growth Continues to Slow

The OECD released their latest economic outlook in November and they expect growth to slow in 2023 before recovering somewhat in 2024.

Their summary captures much of the complexity of what is going on right now.
“The global economy is facing significant challenges. Growth has lost momentum, high inflation has broadened out across countries and products, and is proving persistent. Risks are skewed to the downside. Energy supply shortages could push prices higher. Interest rates increases, necessary to curb inflation, heighten financial vulnerabilities. Russia’s war in Ukraine is increasing the risks of debt distress in low income countries and food insecurity.”

Financial Vulnerabilities Exist

November saw the collapse of a major crypto exchange called FTX with the full impact of that now reverberating through the crypto markets.
The ECB produces a Financial Stability Review twice per year. The most recent one was released in November. The summary is that financial risks have risen as a result of the impact of higher inflation, a weaker economic outlook and tighter financial conditions.

Other Important Developments

Ukraine War Entering Tricky Winter Period
Ukraine forces retook the city of Kherson from occupying Russian troops. Meanwhile Russia is targeting electricity and water infrastructure in order to increase hardship on citizens as winter sets in. There was positive news for global food markets when the grain export agreement, which allows grain to leave Ukraine, was extended for a further 120 days.

US Midterms Don’t Deliver the Expected Red Wave
The democrats did better than expected in the US midterm elections. They retained control of the Senate and while they lost control of the House the margin the republicans enjoy is less than expected. Meanwhile, Donald Trump has declared his interest in running for President again in 2024 despite (a) a poor showing by many of the republican candidates he backed and (b) prominent supporters / donors now moving their support away from him.

Paris Overtakes London
During the month the Paris stock exchange overtook London as the largest stock market in Europe by market cap. As time passes the evidence mounts that Brexit continues to be a significant challenge for the UK.

Ireland Continues to Top the Class
Ireland continues to top the class in terms of its economic performance relative to other European countries. While there has been a fall in the tech sector and some flattening of consumer spending this has been offset by growth in the chemical and pharmaceutical sector. The net result is that Ireland’s tax revenues remain strong and ahead of budget leading to a significant surplus.

World Population Reaches Eight Billion
This month the UN announced that the world population has now reached 8 billion just 11 years after surpassing 7 billion. It is forecast that we will reach 9 billion in 15 years. The most significant factor is people living healthier lives and living longer.

Our Investment Outlook

  • We will see further slowing of growth next year with some countries going into recession.
  • Central banks will continue to raise interest rates even in the face of slowing growth. The market is expecting that central banks will increase rates by 0.5% in December.
  • While inflation may be peeking the labour market remains tight complicating the lives of policy makers so some may argue for a higher rate increase.
  • Inflation will fall next year but our best guess is that it will take a couple of years to get all the way back to the 2% target.
  • We expect pressure on earnings to show up in the first part of the year.
  • Markets will continue to be volatile moving on the slightest hint of positive or negative news.

For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.

As this is the final Markets in 1 Minute for this year may I take this opportunity to wish you and your family a very happy Christmas and best wishes for 2023.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.