Market snapshot: another hugely important week for stocks

December's not been a great month for shares so far, and central banks in the US and UK will have a big influence on what happens this week.

US markets faltered as investors gear up for another pivotal week of economic releases and commentary.

The fragility of recent rebounds was highlighted as fresh risk-off sentiment emerged ahead of an inflation print this week, followed by the latest Federal Reserve decision on interest rates. The two announcements are intertwined, with any prolonged heat on the inflation number providing the Fed with more ammunition to maintain its hawkish view.

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While the expectation of a 0.5% rise in rates is now nailed on, of equal interest will be the accompanying comments on the Fed’s outlook, which could encompass not only the likely terminal rate but also an indication of how long rates may need to remain elevated. There is an increasing acceptance from investors that next year will see no interest rate reductions at all, with early 2024 being touted as the more likely outcome.

In the meantime, overtightening which could lead to a recession remains the key market concern. The inflation number due this week will drive sentiment, and data released on Friday which showed producer prices rising added to concerns that the inflationary beast may not yet have been tamed.

There will also be an update on the behaviour of the hugely influential US consumer, as retail sales are released on Thursday. So far, the numbers have held up reasonably well, suggesting that the consumer has yet to react to the tightening environment, propelled by a stronger jobs market and generally rising wages. By the same token, however, it is also possible that festive spending has simply been brought forward, such that the November release takes on added significance.

However investors react to the flurry of data, the main indices are set to finish the year in deeply negative territory. So far in 2022, the benchmark S&P500 has lost 17%, the Dow Jones 8% and the Nasdaq is still in the crosshairs of investor uncertainty with a decline of 30%.

Asian markets were similarly uncertain overnight, with optimism over China’s relaxation of Covid-19 measures offset by the scale of the challenges ahead in repairing the economic damage which has been done. A stabilising property sector and hopes of additional stimulus from the authorities have provided some support, although a trade data reading showed not only a stuttering economy but also some weakening of international demand, which could also impact any potential recovery.

In the UK, the Bank of England remains between a rock and a hard place ahead of its interest rate decision on Thursday. Despite a month on month increase in GDP in October from September, the quarter on quarter figure fell, moving the UK towards a largely expected recession. This faltering growth runs alongside an inflationary environment which moved to a multi-decade high of 11.1% in October, which seems likely to give the central bank little option but to continue its hiking cycle.

Another rise of 0.5% is expected despite the further damage which it could cause, and a FTSE250 index which has already declined by 19% this year could come under more pressure with its unfortunate mantle of being a barometer for the UK economy.

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Set against such a challenging backdrop, the FTSE100 also dipped in early exchanges, with some buying of defensive shares insufficient to offset a more general decline as investors moved away from the risk-on sectors such as the miners.

The index remains ahead by just 1% in the year to date, which is both an outperformance in relative terms globally, but also an anaemic return amid such an array of economic hurdles.