Market sentiment has turned positive following US central bank chair Powell signalling a slower pace of tightening in the coming months as monetary policy continues to ‘normalise’. A 0.50% hike is expected this month with a forecasted peak of 5% mid-2023, before potential rate cuts later next year.

In the UK, rhetoric from the Bank of England remains hawkish with a further 0.50% rate increase fully priced in for this month, and further hikes expected in the coming months to reach a peak of 4.50%. The UK housing market continues to show signs of cooling with prices dropping 1.4% last month and a significant drop in mortgage approvals as higher rates and the cost-of-living continue to dampen demand.

The European Central Bank are also set to raise rates by at least 0.50% in December as they remain fully focussed on stubbornly high inflation at the risk of a deeper recession.

Events in China continue to be a major focus, but markets remain optimistic that further covid reopening into next year can help underpin global growth.

isk sentiment has turned more positive following the Fed minutes this week, which showed most officials leaning towards a slower pace of rate hikes and led to a relief rally in global equities and a generally weaker US dollar. Further lockdowns in China will remain a drag on global growth but have largely been overlooked by markets.

In the UK, economic data remains dire, but was slightly better than expected, and we fully expect the Bank of England to raise rates by a further 0.50% next month, with inflation expected to remain above 10% well into next year. Analysts forecast rates to peak around 4.50% mid-2023.

In the US, a rate hike of 0.50% is fully priced in for December, with markets forecasting a peak of 5% next year despite hopes that inflation has already peaked. The thanksgiving holidays have led to a general drop in liquidity as traders begin to focus on the end-of-year and risk mitigation.

The European Central Bank also looks set to raise rates by at least 0.50% in December as they remain fully focussed on stubbornly high inflation at the risk of a deeper recession.

The Chancellor announced a range of spending cuts and tax rises in the budget as he aims to restore fiscal credibility and fill the £60 billion gap in public finances. His priority is bringing down stubbornly high inflation, which hit a 41-year high of 11.1%, and although most analysts think we are now close to the peak, it will likely remain above 10% well into next year.

The OBR’s independent assessment was bleak, with households seeing the biggest drop in disposable income on record, with the economy already in recession.

UK jobs data this week was mixed, with unemployment edging up to 3.6%, but wages rising by 6%, which, although higher than expected, further highlights the cost-of-living squeeze against surging price inflation.  

The Bank of England is expected to raise rates by a further 0.50% next month, taking rates to 3.50%, with markets forecasting a peak of 4.50% next year.

In the US, despite the good news that inflation is finally dropping, Fed officials continue to insist there is still a long way to go and they remain in tightening mode, with strong economic data again this week. Markets currently forecast US rates to increase by 0.50% in December, and peak towards 5% mid-2023, followed by potential rate cuts at the end of the year.

The European Central Bank also looks set to raise rates by a further 0.50% in December.

The Bank is expected to raise rates by a further 0.50% next month which would take the Base rate to 3.50%, with markets forecasting a peak of 4.40% next year.

Focus now turns to the governments crucially important medium-term fiscal plans due November 17th, and how they plug the £60 billion gap in public finances. The OBR’s independent forecasts on the impact to the economy and government debt levels will be critical, with the chancellor trying to restore fiscal credibility following the fallout from September’s mini budget.

Some important data to focus on next week, including inflation, jobs, and retail sales.

In the US, inflation dropped by more than expected to 7.7%, reinforcing hopes that we are now past the peak and will continue to see a decline into next year, relieving pressure on consumers and in turn on the Fed. With a recession highly likely, the market expects the hiking cycle to slow in the coming months, with rate cuts potentially needed later next year.

Whilst in Europe, we expect the central bank to continue hiking aggressively as they remain focussed on stubbornly high inflation, despite the ongoing risks of slowing growth amid the hugely challenging economic outlook. The latest inflation data is due next week.