New wave of COVID cases in China pushes oil prices down

The release of the Fed minutes last week suggested that rate hikes lower than previous ones could occur at future policy meetings. Markets are widely expecting the FOMC, which sets rates, to return to a 0.50% hike in December after four consecutive 0.75% hikes. Some central bank officials said they still saw little sign of a slowdown in inflation, but other members expressed concern about the risks to the financial system if the Fed continues to raise rates aggressively. The minutes noted that smaller hikes would give policymakers a chance to assess the impact of successive rate hikes. The next Fed decision on interest rates will be taken on 14 December. On Monday, St. Louis Fed President James Bullard stated his belief that the Fed’s target rate must move to a range of at least 5.00% to 5.25%, from the current level of 3.75% to 4.00%, to be ‘sufficiently restrictive’ to reduce inflation. Mr Bullard believes that the Federal Reserve will need to raise interest rates further and keep them there through next year and into 2024 to bring inflation under control and back towards the 2% target. Still, this hawkish Fed member will defer to Fed Chairman Jerome Powell’s decisions on rate hikes at upcoming policy meetings. He is due to speak this evening on the economic outlook, inflation and employment in the US. We will be watching for any indications of a slowdown in rate hikes.

On the other side of the Atlantic, Christine Lagarde, President of the European Central Bank, believes that inflation has not yet peaked, even if the growth of credits granted to companies and households is slowing down. Bundesbank President Joachim Nagel said that inflation in Germany is likely to remain above 7% next year. In the eurozone, Germany and Spain have reported falling inflation in recent days. Weak oil prices could be a key factor: benchmark indices are at their lowest levels in almost a year and this morning US oil traded at around $79 a barrel, down from over $90 at the beginning of the month. And now some rumours are resurfacing suggesting that a new production cut could be decided by the OPEC cartel.

The situation in China is, naturally, having a strong impact on oil prices: in the world’s second largest economy, manufacturing activity continued to fall in November, according to official figures released this morning. The Purchasing Managers’ Index (PMI), which reflects the good health of industry, stood at 48 points compared to 49.2 in October. This index is obviously undermined by the country’s strict zero-COVID policy, under which entire neighbourhoods, and even entire cities, have been confined. These measures are weighing on business activity (even causing Apple’s share price to fall), disrupting supply chains and fanning the flames of unrest in the country in a way that worries the authorities.

On the currency front, the dollar index is stable for a week. The euro-dollar peaked just below 1.05 before returning to the 1.0350 mark. The pound reached a high at 1.2146 before consolidating below 1.20. The rebound of the British currency is remarkable: just two months ago the GBP/USD pair was trading at an all-time low of 1.0356. The resignation of Liz Truss and the arrival of Rishi Sunak have brought a little more political stability and reassured the markets. But inflation in the country is still high: the change in food prices reached a new high of +12.4% over one year.

The price of gold has remained stable over the week. After its recent rise, the XAU is moving around $1,750 without breaking the first resistance at $1,760.