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Interest rate hawks refuse to loosen their greenhouses

Fed and ECB meetings and interest rate decisions in December dampened hopes for an end to monetary tightening. Although both central banks raised interest rates by only 0.5 percentage points, they both sent the same message to markets: monetary tightening could continue longer than the market expected. The ECB’s message was seen as more hawkish than ever.

The future evolution of the euro overnight interest rate has raised expectations. It has risen from about -0.6% to over 1.9% since the summer. Before the central bank’s meeting in December, it was expected to reach around 2.6% by the end of next year. It is now expected to exceed 3% by the end of next year. In addition, excess liquidity in the euro area fell by €500 billion in December, pushing interest rates to new highs. 

Short- and long-term interest rates rose more than 0.5 percentage points in December. The yield on German two-year debt rose to 2.73% and that on the ten-year bond to 2.56%. Yields have not reached these levels for more than a decade. 

Inflation in the euro area has not yet fallen as sharply as in the United States. The preliminary estimate, to be announced in January, is expected to be 9.2 to 9.7 per cent. Volatile energy prices and the impact of subsidies could hold surprises throughout the winter season. The trend is promising, but the level remains intolerable for the central bank.

In the United States, the rise in the yield on 10-year bonds was much smaller, at 0.13 percentage points. The yield fell as much as 0.3 percentage points below the level at the end of November.The yield spread on the closely watched curve inversion, which is the difference between 10-year and two-year yields, has also narrowed. However, the pace of economic growth has slowed and a weak December is likely to fuel rumours of a recession. The Fed rate is now expected to reach its all-time high of 4.9-5% in May/June 2023.  

Still morecomplicated in China

China has made a 180° turnaround in its coronavirus policy, increasing uncertainty about economic growth, at least in the short term. Infection rates have risen dramatically following the lifting of coronavirus restrictions and people are now avoiding public places, which could also be felt during Chinese New Year celebrations in January. Economic activity will inevitably suffer. Optimistic forecasts suggest that the coronavirus will soon reach its peak, after which economic activity could return to normal. 

In China, equity markets rose 2.3%, in euro terms, on the MSCI China Index in December. Other markets were mainly down, with the MSCI Index down as much as -8.4 percentage points in North America. Nordic stocks fell 0.8%, based on the OMX Nordic 40 index.

Performance of major asset classes in 2022

Region / Asset Class Return in 2022
North America -19.9%
Finland -12.9%
Global equities -18.5%
Japan -17.1%
Europe -9.5%
Asia ex Japan -6.4%
Emerging markets -19.2%
Euro 3 month Euribor -0.5%
Euro Government Bonds -18.2%
Euro Investment Grade -14.0%
Euro High Yield -11.5%
Global High Yield -11.8%
Emerging markets (Euro hedged) 0.0%
Region / Asset class31.12.2022Return in 2022
Euro / dollar1.067-5.8%
Yen / Euro139.87.2%
Pound / dollar1.130-5.2%
Dollar trade weightet103.78.1%
Euro trade weightet119.80.8%
German Government 2 year2.713.35
German Government 10 year2.522.70
USA 2 year4.433.70
USA 10 year3.882.36
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