Inflation surprised on the downside. US inflation fell to 3.2% in October while early estimates showed eurozone inflation declined to 2.4% in November. UK inflation, recently stickier than most, slowed sharply to 4.6% in October, while the Chinese economy fell back into deflation with prices falling 0.2% year on year.

The latest financial market strength has been fuelled by a growing belief that major economies could enjoy a soft landing. What does this mean? In essence, it is the view that they will avoid any predicted recession, instead gliding gently into a period of lower growth with fewer inflationary pressures.

Equity and bond markets enjoyed a surprisingly sharp rally. Why now? It’s all to do with the perception of softer messaging from the US Federal Reserve (Fed). Markets have taken the ‘higher for longer’ interest rate plateau on board and are looking for the next move in rates to be downwards.

US third quarter GDP data released at October month-end rose by 4.9%, its fastest rate of growth since Q4 2021. Domestic consumer spending was supportive, reflecting healthy wage growth.

Tensions mounted in the Middle East, sparking fears of a broader conflict in the region. Financial markets responded, with equity markets dogged by uncertainty, while gold performed strongly.

So said the chair of the US Federal Reserve (Fed) with regard to the US economy. Despite the Fed’s best efforts, having raised interest rates by over 5 percentage points in only 18 months, the US economy appears irrepressible.

Recent decades have brought a succession of unprecedented global events, leading some to view the world as in a state of ‘permacrisis’. Faced with exogenous shocks to their domestic economies, governments have resorted to increasing their borrowing to fund their way out of crisis after crisis. 

Inflation in the US remains high, signalling to many market participants that Fed interest rates will remain elevated and dashing hopes of substantial rate cuts in 2024. A narrowly avoided US government shutdown, averted at least until mid-November, added to the malaise. The European Central Bank raised rates for the 10^th time in 14 months to a record high of 4%, but it signalled this was likely to be its final hike during the current cycle. 

Central banks in developed markets reinforced the message that rates will need to stay high for some considerable time to bring inflation back to target, dashing hopes of substantial cuts next year. In contrast, Brazil cut rates for the second time this cycle, while Poland lowered borrowing costs for the first time in more than three years.

The last few years, marked by the global pandemic and geopolitical tensions, have brought a period of de-globalisation of world trade. However, despite disruption to the established trading order, with its extended supply chains, new patterns of trade continue to emerge.

Markets contemplated a milestone moment, as western central banks appeared to hit the ‘high for long’ pause in their hiking cycle. The US Federal Reserve (Fed) and the Bank of England left rates on hold, a week after the European Central Bank (ECB) raised rates, possibly for the last time this cycle.

August brought the usual pause in both central bank meetings and interest rate decisions. However, the month ended with the Jackson Hole summit for global central bankers.

China’s economic activity remained under pressure. Exports tumbled 14.5% year on year in July, the steepest fall since the start of the pandemic, while imports fell 12.4% on a year-on-year basis.

As summer temperatures soared in the northern hemisphere, the head of the UN claimed that the world had moved to an ‘era of global boiling’. The International Energy Agency (IEA) declared in June that oil consumption of 103 million barrels per day (mbpd) was the highest figure ever recorded, a reminder that energy is required for cooling as well as heating. 

President Biden’s clean energy bill, known as the Inflation Reduction Act, passed its first birthday. The legislation, worth up to $369 billion in tax breaks and subsidies, has catapulted the US to become a global leader in green technology, as well as advancing its 2050 net zero goals.

The US Federal Reserve (Fed) resumed its rate hiking path in July, with interest rates hitting a 22 year high. However, as US inflation continued to moderate, the Fed insisted it would be ‘data dependent’ regarding further rate hikes this year. 

After the pause in June, the US Federal Reserve (Fed) raised interest rates by 25 basis points in July, taking the federal funds rate to a range of 5.25-5.50%, a 22-year high.

The ‘Magnificent Seven’ big tech stocks continue to dominate the S&P 500 index. Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta now represent around 30% of the index. The standout performer among them has been Nvidia, the superchip manufacturer, whose share price has more than tripled so far this year.