U.S. Equity Markets finished Monday lower led by the 1.06% fall in the NASDAQ 100. Despite the lower closes, the VIX also closed lower by over 2%. Markets had a quiet start to a holiday-shortened trading week. A surge in COVID-19 cases in China quelled burgeoning macroeconomic optimism in that region last week. The latest in Fedspeak continues to suggest a dovish central-bank policy as Federal Reserve Bank of Atlanta President Raphael Bostic said he favours slowing the pace of interest-rate hikes over the weekend. And oil and energy recovered lost ground early in the day after later refuted reports arose of an increase in production from OPEC+. Big gains for the stock market could be right around the corner. Since the start of this year, the Federal Reserve has been raising interest rates to try and get a handle on inflation. After all, the U.S. Bureau of Labour Statistics’ Consumer Price Index (“CPI”) hit a four-decade high of 9.1% in June. That change is destroying the disposable income of households and businesses. So, the central bank is trying to slow inflation growth and bring about price stability. That way, consumers and companies can better understand what their income will look like going forward. Then they can better budget their money in terms of spending and saving. The Fed has said it needs to kill economic demand to get inflation back under control. Its best tool for doing that is by raising interest rates. However, that means it costs more to borrow- making the Dollar more valuable. As a result, it pulls money out of the financial system because the Dollar’s value rises and investors want to pour more money into the safety of higher-yielding U.S. Treasury bonds. But this won’t go on forever. Based on recent commentary from central-bank policymakers like San Francisco Fed President Mary Daly and St. Louis Fed President James Bullard, interest rates need to get to at least 5% before they pause or stop raising rates. We are already at 4%, so that would imply the bulk of the rate hikes are in the past. Heck, even Fed Governor Christopher Waller, a noted hawk (meaning he is inclined to raise interest rates), said last week that he is open to slowing the pace of hikes. Looking at stock market outcomes from past rate-hike-cycle peaks shows that a pause will act as a tailwind for the S&P 500 Index. Fiscal (government) and monetary (central bank) policies during the COVID-19 pandemic created trillions of Dollars’ worth of liquidity that previously did not exist in the financial system. All of the consequent spending caused domestic economic output to rise last year by 5.7% compared to the 2.3% average between 2009 and 2019. Throughout this year, members of the central bank have said they want to get to a point where they feel monetary policy is restrictive once more. In other words, where it is weighing on inflation growth. A number of policymakers, including Vice Chair Lael Brainard, have said we are already there. But they would like to go a bit further to ensure inflation growth comes back to the 2% target. So, considering the Federal-Funds Rate is already at 4%, that means we don’t have much further until we hit the 5% mark. In past rate-hike cycles, the Fed has sought to keep raising rates until the real Fed-Funds rate turns positive. That metric is derived from current interest rates minus CPI annualised growth. Back in March, the number stood at -8%. But since then, as inflation growth has eased and interest rates have jumped, the number has dropped to -4.5% in October. Federal Reserve Chair Jerome Powell has told us this is an outcome the central bank is currently seeking. At the last policy meeting in November, he said the real Fed-Funds Rate must turn positive before the central bank would consider pausing its rate hikes once more. Within the S&P 500 Index, four of the 11 sectors finished lower. European Markets also closed in the red. Markets ended lower as attention continues to focus on global central bank policy. The region’s largest economy showed potential for slowing inflation as Germany’s Producer Prices unexpectedly dropped in October. The European Central Bank’s chief economist Philip Lane said that the bank must continue to raise rates as there will be certain economic lags in the process of combatting inflation. And analysts continue to focus on U.K. and Euro-Zone recession outlooks as economic output continues to shrink close to pandemic-level lows. In Asia, Markets ended largely weaker after a quiet trading day. Overarching themes continue to influence investors – one being the reaction to the U.S. markets ending the week with a loss and the other a resurgence of COVID-19-related infections and deaths. This comes on the heels of last week’s announcement by Beijing to ease COVID-19 restrictions in China. South Korean exports shrank year-over-year as chip and smartphone demand fell globally. And Thailand’s economy posted its fastest growth in a year for the third quarter despite the recent rise in global uncertainty. Elsewhere, Oil fell 0.42% while Gold fell a further 0.82%.

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