Financial Bulletin – September 2022


Financial markets had been staging something of a recovery on hopes that interest rates might peak by the end of this year.

Unfortunately, by the end of August these hopes had been dashed by a speech made by the Chairman of the Federal Reserve.

In his speech Jerome Powell strongly implied that rate rises would be a feature for some time and that a period of weak growth and employment would be a price worth paying for bringing inflation down.

Meanwhile the global economy continued to deteriorate.

The UK economy contracted in the second quarter of the year (as expected) and is forecast to officially fall into recession in the third quarter.

Outside of the COVID crisis the US manufacturing sector contracted at the fastest rate since the 2009 financial crisis.

The weakening economic outlook, in combination with Jerome Powell’s comments, meant that most stock markets fell over August.  

Over the last 6 months the FTSE 100 returned 1.89%, the S&P 500 returned -7.63%, whilst the Euro Stoxx 50 returned -4.68%.

The Japanese Nikkei 225 returned 4.64% over the same period.

The broad emerging markets index returned -13.68% in US$ terms.

The 10 year US Treasury yield rose significantly over the month and touched highs not seen since 2011.

US Economic News

US growth in the second quarter of the year was revised up slightly (to -0.6%) but this was not enough to avert an official recession.

The picture painted by the latest surveys was one of a clearly weakening economy.

The manufacturing sector contracted at one of the fastest rates in the last 10 years and growth in job numbers was essentially flat.

Across the economy as a whole, new orders for companies contracted as consumer confidence remained at an historically low level.

However, despite the weakening economic outlook there was at least more positive news where inflation is concerned.

The headline rate fell to 8.5% in July (from 9.1%), which was comfortably below expectations. The Federal Reserve’s preferred measure of inflation also fell and is actually now at the lowest level this year.

Towards the end of the month the Chairman of the Federal Reserve gave a keenly anticipated speech which, as it turned out, had quite a significant effect on financial markets.

In the speech Jerome Powell talked about how a “sustained period of below-trend growth” would be needed to get inflation under control and that the Bank “must keep at it until the job is done.”

The speech was widely interpreted by investors as meaning that the Fed’s focus will be firmly on bringing inflation down, regardless of the cost to growth and employment.

UK Economic News

As in the case of the US the latest surveys pointed to a further deterioration in the health of the UK economy.  

The loss of momentum in the manufacturing sector was particularly acute but the important services sector is now also struggling as consumers tighten their belts.

Retail sales fell for the fourth month in a row.   

One piece of good news came from the fact that companies reported a slight easing in supply chain pressures. At some point these lower pressures will feed through to lower headline inflation.

However, for now the inflation rate remains extremely elevated and in July breached the 10% mark for the first time since 1982.

The twin effects of high inflation and a weak growth backdrop is piling more pressure on the Bank of England.

The Bank decided on a further 0.5% rate rise at its August meeting, which was widely expected. The base rate is now at its highest level for over 10 years.

Accompanying the decision, the Bank issued an updated inflation forecast, now expecting inflation to reach 13% by the end of the year.

Eurozone Economic News

The Eurozone economy weakened during August with the largest economy, Germany, looking particularly subdued.

The German economy has been particularly dependent on Russian energy and the threat of energy rationing has seen consumer confidence fall to the lowest level in at least 25 years.

Meanwhile inflationary pressure continues to build with the rate reaching 9.1% in August, another record high.

After the European Central Bank introduced the first rate rise in 11 years during July markets continued to price in a further rate rise in early September.

Wider Economic News

After a few months of recovery, the Chinese manufacturing sector contracted again after new lockdowns were brought in an effort to contain COVID.

President Xi has stated that weaker economic growth is a price worth paying for “zero COVID.”

It is no surprise therefore that business confidence remains weak.

Elsewhere the Japanese Central Bank is now the only major Central Bank still outwardly showing no inclination to raise rates.

Still, the manufacturing sector only just made it into positive territory as weak global demand weighed on the sector.

Meanwhile the services sector is already estimated to be contracting.   

Financial Markets and Corporate News

After rising robustly for most of July and the first part of August stock markets were brought back down to Earth after Jerome Powell’s ‘hawkish’ speech.  

Over the last 6 months the FTSE 100 returned 1.89%, the S&P 500 returned -7.63%, whilst the Euro Stoxx 50 returned -4.68%.

The Japanese Nikkei 225 returned 4.64% over the same period.

The broad emerging markets index returned -13.68% in US$ terms.

US Treasury yields rose significantly as markets priced in more interest rate rises.

The Investment Association (IA) UK Gilts sector returned -15.75% over 6 months, whilst the IA Sterling Corporate Bond sector returned -10.89% and the IA Sterling High Yield sector returned -6.97%.

 Summary of Key News:

  • The Chairman of the US Fed implied that interest rates would need to keep rising for some time – this surprised markets.
  • Inflation rates continued to climb in many countries.
  • However, US inflation actually fell.
  • The Bank of England forecast that inflation could reach as high as 13%.
  • UK retail sales for the fourth month in a row.
  • The Chinese economy lost momentum after further COVID lockdowns.

Financial Markets:

  • Over 6 months the FTSE 100 returned 1.89%, the S&P 500 returned -7.63%, and the Euro Stoxx 50 returned -4.68% (total return).
  • The Japanese Nikkei 225 returned 4.64% (total return).
  • The broad emerging markets index returned approximately -13.68% (in US$ terms).
  • The   IA UK Gilts    sector    returned -15.75% over 6 months, whilst the IA Sterling Corporate Bond sector returned -10.89%, and the IA Sterling High Yield sector returned -6.97%.


A few months ago the major challenge facing Central Banks was to bring inflation under control without pushing their respective economies into a serious recession.

It appears that the US Fed has now resigned itself to the fact that a prolonged recession is inevitable.

The question now becomes how long Central Banks will have to keep their economies depressed before inflation comes into line.

The fact that the latest surveys in the US, UK and the Eurozone all reported that supply chain pressures are easing, as well as the headline rate in the US falling, will fuel hope that Central Banks will not need to keep their foot on the brake for too long into next year.

Central Bank policy will of course also be crucial to the immediate course of stock markets.

Not only will an extended recession put pressure on company earnings but higher interest rates make investors less willing to pay for ‘growth’.

Since the start of the year, we have seen a rotation away from highly valued ‘growth’ stocks (such as technology) and towards ‘value’ stocks (such as energy). For this trend to reverse likely requires consistent evidence that inflation has peaked and that Central Banks can once again turn their attention to growth.