Looking back at 2022

First of all, it has been one of the worst years in history for bonds and a bad one for stocks. In fact, for US Treasuries, the first few months were worse than anything witnessed since 1788, which highlights the historical dimension of the environment that investors have had to deal with in 2022. In addition, 2022 marks a year in which almost all assets, not only bonds and equities, lost value in sync, which, again, is a relatively rare occurrence.

This leads to the second peculiarity of the year, namely the economic mix facing financial markets. Global real growth, at around 3%, has fallen only slightly short of the average of the pre-pandemic years. Yet the global inflation rate has been overshooting at a staggering 8%, which is higher than any number seen in past decades. The combination of lacklustre growth and record inflation suggests that 2022 has been a year of stagflation – a mix rarely seen since the 1970s.

This brings us to the third peculiarity of the year: monetary policy, or rather the tightening of it. The growth/inflation mix has pushed central banks – first and foremost the US Federal Reserve – to tighten the money supply at an unprecedented pace. Central banks were perceived as being behind the curve early on, and they struggled to catch up. This created shocks in the financial system that led to the asset price declines outlined above.

So here we are, not long before the final curtain falls on 2022. It is hard to believe that anyone in financial markets will miss it. Yet it will likely be a major point of reference in the future (as in “Remember in 2022, when…”).

Looking to the future – central banks in focus

The US Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE), the Swiss National Bank (SNB), and the Norges Bank decided on interest rates this week. We had expected a slowing of the pace of rate hikes. The Fed hiked rates by 50 basis points on Wednesday, while on Thursday, the ECB, the BoE, and the SNB followed suit, after hiking by 75 basis points at their previous meetings. The Norges Bank, which already slowed the pace of rate hikes at its previous meeting to 25 basis points, proceeded at this lower pace.

Peaking inflation is the major reason why central banks are able to proceed in a more prudent way in applying the breaks on economic activity. In the US, lower energy prices have already contributed notably to easing inflationary pressures. In Europe, demand destruction driven by higher prices – first and foremost energy prices – and higher interest rates argues for a more cautious approach towards the tightening of monetary policy.

Central banks are also set to publish some guidance for 2023 monetary policy. We expect downward revisions for economic growth for 2023 and beyond. Lower inflation forecasts are less likely.

As the slowing of economic activity and the cooling of the labour market become increasingly significant in 2023, the Fed is likely to refrain from additional rate hikes in 2023, and the ECB, the BoE, and the SNB are likely to slow the pace of rates hikes even further before stopping rates hikes altogether.