Lacking the kind of economic data or central bank decisions that have moved asset prices recently, markets mostly drifted sideways or slightly lower during the week. As a result, most asset classes have been able to hang onto their recent gains. This rally has now lasted for two months, having been initially triggered by the expectation, subsequently proved correct, that central banks would slow the rate of increases in interest rates. That presumed a peak in the rate of inflation - which duly occurred, giving the rally yet more impetus.

Chairman Powell of the Federal Reserve has tried to temper these animal spirits but, so far, his comments have had little effect. He gets another chance to make his views known this week when the Federal Reserve meets and, more importantly, at the press conference afterwards. The Fed is widely expected to raise rates by 0.5% but, with Chairman Powell having warned that what matters is not so much the pace of rate rises as much as how high rates will eventually go, more attention will be focused on where the board of governors expects interest rates to end up. Whether Powell’s message to the markets will change will partly be determined by American inflation data, which is due to be published as US markets open today. Both the “headline” measure, which includes all components of the basket of goods and services used to measure inflation, and the “core” measure, which excludes volatile food and fuel prices, are expected to have declined from last month. Such an outcome would please markets as it is highly unlikely to prompt a change in direction at the Fed.

UK markets are also on tenterhooks this week, with inflation data set to be released only one day before the Bank of England meets to decide interest rate policy. Inflation is expected to have fallen to 10.9% in November, from 11.1% in October, as the contributions from fuel and tobacco prices declined. The Bank’s interest rate is widely expected to rise by 0.5% to 3.5%, but markets will be focused on the extent to which the more dovish committee members disagree with the consensus.

Changes to China’s Covid strategy continue to dominate the financial news, with the authorities accelerating their departure from the draconian “Covid-zero” policies during the week. This opening-up has got markets very excited, prompting an extraordinary rally in Chinese assets that has been able to resist bad news in other areas, such as the new tariffs on Chinese steel and aluminium being considered by the US and European Union, or the increased American support for Taiwan that received bipartisan support in Congress last week.

The longer-term implications for the change in Covid policy are undoubtedly positive, not least by improving supply chains and reducing inflation in goods prices in the developed world. However, in the short-term there may be some teething problems. Analysts worry that the reopening has progressed far beyond China’s ability to control the virus, because its population has little immunity and vaccination programmes have been relatively limited in scope. The virus is already rampant, and winter is approaching, putting stress on Chinese healthcare services. Even a modestly lethal strain of the virus could cause millions of deaths in a population this large, forcing the authorities to backtrack on the recent changes. 

A host of chief executives in the semiconductor manufacturing industry turned up to celebrate their competitors’ success last week. President Biden spoke at a new silicon chip manufacturing site in Arizona, funded by the industry’s largest player, Taiwan Semiconductor Manufacturing Company (TSMC), to the tune of $12 billion. The chips manufactured at the plant will be used by Apple, but the geopolitical message is what drew chief executives to the meeting: the western world wants more chips to be manufactured on home soil, or at least within easy geographical reach, to avoid potential supply disruptions associated with Taiwan and China.

One of the more bizarre consequences of the rise of the technology sector over the past twenty years has been the belief that they can accomplish anything in any industry that has any technological exposure. Elon Musk’s troubled acquisition of Twitter is a good example of this over-confidence. The development of autonomous electric vehicles is another. This week it was the turn of Apple to dial back its expectations for its self-driving project. Instead of a fully autonomous vehicle, Apple will now design a conventional vehicle with a powerful computer to minimise the input from human drivers. This occurs after years of changes in Apple’s goals, priorities and management of the project.

The price of oil dropped again during the week despite the shutdown of a major pipeline in America due to a spillage. As has been the case for the past few months, worries about the supply of oil have been overwhelmed by worries about the impact of recession on consumption, and the oil price is now down nearly 40% from its peak in June. Nevertheless, the oil industry is the place to be if you want pay that keeps pace with the rate of inflation. Exxon Mobil Corp has just awarded its American employees their biggest salary increases in fifteen years. The 9% rise beats the current rate of US inflation and comes after the company recently reported its highest-ever quarterly profits. Over at Chevron Corp, meanwhile, the company is responding to the potential for higher returns by upping its capital expenditure by 13% next year, comfortably above the rate of inflation. 

• UK GDP rose by 0.5% between September and October, slightly above expectations. October’s growth rate was supported by the return of the number of working days to their seasonal norm, following the extra bank holiday for the Queen’s funeral in September. The British economy has been a relative laggard following the pandemic, and GDP in October 2022 was still 0.1% below its January 2020 level.
• Chinese trade activity disappointed already-diminished expectations, with both exports and imports plunging. Exports had their worst month since the first Covid lockdown in February 2020, with exports to the US, EU and UK contracting at double-digit rates. It seems that consumers are switching their priorities from gadgets, which China is very good at manufacturing, towards food and energy. 

• The European Central Bank is widely expected to raise its key interest rate by 0.5% and, more importantly, to make an announcement regarding the vast inventory of government bonds acquired during the past fifteen years of unconventional monetary policy.
• Business activity surveys for the Eurozone in early December are expected to show that order books are contracting, but at a slightly slower pace than in November. UK business activity is expected to have contracted at a slightly more rapid rate than the previous month.