Stocks rally as investors bet Chinese restrictions to loosen, but inflation remains enemy number one

Maybe it’s not all pain.

Stocks are rising this afternoon, as investors bet that Beijing will press on with plans to ease its strict COVID-19 policies.

The year has been turbulent thus far for equities, to say the least. Following an insane pandemic period propelled by basement-level interest rates and a warm money printer, stocks have regressed significantly this year as seemingly every variable has turned negative.

There is Putin’s war in Ukraine, choking the energy market and provoking chat of blackouts in Europe this winter. It is not just energy rising, however, as inflation numbers worldwide have mooned, with the UK still sitting in double digits.

With central banks forced to hike rates in response to the spiralling inflation, liquidity has been pulled out from under investors’ feet, and stock prices have cratered.

Chinese lockdown concerns had hurt stocks

The last few days has brought fears for investors that one of the most ominous macro variables was returning with a vengeance: COVID lockdowns.

China is facing widespread protests, with businesses closing down and strict quarantining introduced in Shanghai, as the Chinese government reaffirms its commitment to zero-COVID policy. In addition to the phrase “zero-COVID” triggering my PTSD, the trouble had sparked equities to move downward to open the week.

Now, though, they’re back. The moves in European stocks followed Chinese stocks pumping aggressively upward, as the market bets that a swifter reopening in China will come than was otherwise priced in. China’s CSI Index jumped 3.1%, while Hong Kong’s Hang Seng index jumped up more than 5%.

The FTSE 100 has just hit a three-month high as I type this, trading at £7526, in what has been a strong surge for the British index, which is now trading above levels seen when Lizz Truss commenced her disastrous reign at the start of September, something I wrote a deep dive for here.

Inflation remains key figure

While the COVID lockdown situation is one to monitor, it remains secondary to inflation when it comes to ultimately deciding where the market goes. As I wrote eight months ago, the market won’t transition until inflation can be checked off.

Inflation readings remain highly elevated, including in the US, where the most recent CPI came in at 7.7% – lower than October’s discouragingly high number, but still bloated. Numbers like that have almost become normalised, given they were flirting with double digits not long ago, but that remains a grave problem.

I have written about my pessimism regarding the state of the economy plenty, and I don’t feel we are near a turning point yet, as we head into winter. We won’t be leaving this new paradigm of rising interest rates anytime soon. This was reaffirmed on Monday when the president of the Federal Reserve Bank of New York, John Williams, pointed towards unemployment as likely to rise towards 4.5 to 5% before the end of the year.

At the current employment figure of 3.7%, the labour market has yet to be truly shook by this tightening economy. Against this context, the worry about inflation remains high, and the likelihood of tightening monetary policy remains. And we won’t see a recovery until the economy can shrug these off.