November 2022 Market Update
November was a strong month for investors, with most major indices recording gains for the second consecutive month. A widely used benchmark, the SP500 index, extended its October rally, up 5.38% for November, and up 14.06% from its October 12 low. The SP500 is down nearly 15% year-to-date.
Figure 1: US inflation results
To begin November, the U.S. Federal Reserve raised its policy rate by 75 basis points (bps), marking its fourth consecutive 75 bps interest rate hike, and its fastest rate increase since 1980. Days after this announcement, markets rallied when the U.S. reported an annualized headline inflation rate of 7.7% for October, the lowest pace since January. This announcement suggests the worst of inflation may be behind us, leaving room for more conservative rate hikes in the coming months.
In his November 30th address, Federal Reserve Chair Jerome Powell indicated that the central bank plans to raise rates by another 50 bps at its December meeting, however this decision will likely be impacted by the release of November inflation data due mid-December. A 50 bps hike could signal a new phase of slower policy tightening.
Despite rising equity prices, Oil fell X% in November, amid higher-than-expected U.S stockpile data and concerns that a rebound in Covid-19 cases in China could further hurt demand. OPEC announced that it would continue with current production levels, to assess the impacts of an oil price cap on Russian crude that will come into effect in December. The incoming price cap is an agreement between the EU and G7 nations, and places a curb on shipping, insuring and funding Russian crude that is priced higher than $60/barrel. In addition, the EU has embargoed any Russian crude being shipped by sea. The cap, which is intended to decrease Russian profits, could exacerbate US inflation if increasing demand raises price.
Figure 2: China protests demanding the end of the Covid-zero policy
Oil could see additional upward pressure if industrial demand increases as a result of China easing its isolationary Covid-zero policy following mass protests. The protests broke out following an apartment fire in a remote region in the city of Urumqi, where quarantined citizens died due to containment measures which blocked their escape. Any loosening of zero-covid policies would likely have a positive economic impact on the Chinese economy, however it could undercut Xi’s efforts to cast China's pandemic response as superior to the west. In addition China’s population currently has poor herd immunity, and a low vaccination rate amongst elderly people, presenting a risk of high infections were China to open too quickly..
Heading into December, we will look for economic indicators to confirm whether the economy is cooling, and if inflation has peaked. As monetary policy acts with a lag, past rate hikes are likely to weigh on the economy heading into 2023, raising the risk of an ensuing recession.
