New highs
Global activity data suggests that manufacturing held up towards the end of the year, despite renewed lockdown measures in many countries. Services, as expected, were impacted to a greater extent as travel bans and limitation on movement dampened some festive cheer. The US economy grew by an annualised 6,9% in the fourth quarter, supported by consumer spending ahead of the typical festive season. The US recorded GDP growth for 2021 at 5,7%, the highest annual rate in decades. The IMF released its World Economic Outlook for 2022, forecasting global growth of 4,4% for the year, a downgrade from the previous forecast of 4,9%. 

Although energy costs and food inflation remain active drivers of global inflation, inflation outcomes continue to exceed expectations, suggesting broadening pricing pressures. In December, US inflation (7,0% yoy) reached the highest level since 1982. Eurozone inflation also recorded a new historic high, reaching 5,0% year on year in December. At 5,4%, the UK recorded its highest inflation reading in 30 years. 

China recorded economic growth of 4,0% yoy in the fourth quarter, bringing full-year growth for 2021 to a credible 8,1%. Growth momentum has however been slowing in the latter half of the year, as a weaker property sector and the country’s strict Covid-19 policy and restrictions weighed on the economy. In contrast to the rest of the world, inflation in China has shown early signs of moderation. With the emergence of Omicron and moderating inflation prints, Chinese policymakers have started easing policy, including cuts to several benchmark lending rates.

Global bond markets traded under pressure, as bond yields rose to reflect more hawkish sentiment. The US 10-year bond yield jumped in the first few weeks, ending the month at 1,78%, the highest level since April 2020. In US dollar terms, the Barclays Global Aggregate Index declined by 2,0% in January.
 

The main game in town
In December, the US Federal Reserve (Fed) communicated an accelerated pace of tapering of bond purchases to end in March 2022, and signalled earlier interest rate hikes. But it was the hawkish minutes from this meeting, released in January, and several eye-watering high-inflation prints that sent the markets climbing the wall of worry. Commentary from Fed governors later in the month brought into focus the possibility of a hike as early as March, and consideration for increments of 50 bps. Fed chair Jerome Powell’s comments at the January meeting confirmed plans to decrease the Fed’s balance sheet and convinced some economists that seven hikes over 2022 were possible. With US unemployment down to 3,9%, within distance of prepandemic levels, markets now consider many suggestions not only possible but also probable. If the market’s response in the first month of this year is anything to go by, 2022 is going to be a volatile year, with policymakers setting the tone.
 

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