Market Review

Global Markets Monthly Update
December 2022
Key Insights
  • Most equity markets gave back a portion of their recent gains as central banks seemed to signal that they would accept causing a recession in 2023 as the price for cooling inflation.
  • The U.S. lagged every other developed market except the Netherlands as Federal Reserve officials predicted more rate hikes in 2023.
  • Emerging markets outperformed, helped by new stimulus measures in China and the country’s abandonment of strict COVID restrictions.


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Stocks fell sharply in December, although the S&P 500 Index’s decline of 5.8% (including dividends) was only its fourth-worst monthly showing in the most difficult year for markets since 2008. While shares sank across the board, most sectors outperformed the index as a whole, which was dragged down by the heavily weighted consumer discretionary (Tesla down 36.7%), information technology (Apple down 12.2%), and communication services (Google parent Alphabet down 12.5%) segments. Large-cap value stocks fell the least, which was reflected in the smaller decline of the narrowly focused Dow Jones Industrial Average.

Although the declines were not as drastic nor as uniform as they were for stocks, bond markets fell as well and closed out the worst year on record for the Bloomberg U.S. Aggregate Index. The yield on the benchmark 10-year U.S. Treasury note was volatile over the period, falling as low as 3.40% in intraday trading early in the month before ending higher for the month at 3.88%. (Bond prices and yields move in opposite directions.) The municipal bond market managed a small gain, however. The Federal Reserve increased official short-term interest rates for the seventh time in 2022 in mid-December but slowed the pace of rate increases from three quarters of a percentage point (0.75%) to half of a percentage point (0.50%).

Good News Is Bad News…While Bad News Is Also Bad News

Fears that the Fed would push the economy into recession in 2023 to bring down inflation continued to weigh on markets. As investors worried about the Fed’s resolve to slow growth, it was arguably a month in which good news for the economy was bad news for stocks. A surprise increase in a gauge of services sector activity seemed to send stocks lower at the start of the month, for example. Investors also appeared to react negatively to a series of weekly jobless claims that came in below expectations.

Conversely, negative economic signals seemed to do little to boost hopes for a dovish turn in monetary policy—but appeared simply to deepen recession fears. Stocks fell following a surprise 0.6% drop in November retail sales, for example, the largest decline in nearly a year. The market was also down following news that a composite gauge of service and manufacturing activity had fallen to its lowest level since May 2020. Housing data were almost uniformly negative, with existing home sales and building permits falling to their lowest levels since early in the pandemic, while pending home sales tumbled to their second-lowest level in two decades.

Many investors seemed to decide, instead, that the Fed was willing to accept a recession as the price to pay for bringing inflation down. The markets recorded nearly all of their losses for the month following the Federal Reserve’s policy meeting, which concluded on December 14. Our traders noted that the major stock indexes tumbled over 1% within seconds of the release of the official post-meeting statement—perhaps as investors flipped to the quarterly summary of individual policymakers’ economic projections. The median projection for the federal funds rate in 2023 rose to 5.1%, well above the 4.6% officials had anticipated in September.

Policymakers Stress the Importance of Cooling Hot Labor Market

Fed Chair Jerome Powell may have added to worries at his post-meeting press conference by stressing the need for further rate hikes and the inflationary dangers of a tight labor market, which has proved resilient—employers added another 263,000 nonfarm jobs in November, above expectations—despite the Fed’s aggressive rate hikes. Similar rate moves and commentary from European central banks seemed to further darken investors’ moods.

The month brought mixed evidence of how quickly inflation was cooling, although all year-over-year data showed it remained well above the Fed’s long‑term 2% target. Sentiment seemed to get a small boost from the release of the consumer price index, which rose only 0.1% in November, bringing the year‑over‑year gain to 7.1%. A modest rally also followed news that the increase in the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, came down to 5.5% for the 12 months ended in November, its lowest level in over a year.

Wage inflation, the Fed’s expressed primary concern, surprised on the upside, however. Having been on a gradual downtrend since March, average hourly earnings growth reaccelerated to 5.1% over the 12 months ended in November, though severance payouts to highly paid tech workers may have been partly to blame. Stock futures also fell sharply on news that producer prices had not come down as much as expected.


Shares in Europe fell sharply in December on renewed worries about rising interest rates and a looming economic slowdown. In local currency terms, the pan-European STOXX Europe 600 Index ended more than 3% lower. Major indexes in Germany, France, and Italy fell by a similar amount. The UK’s FTSE 100 Index also pulled back but lost less ground.

ECB Reduces Size of Rate Hikes but Suggests Higher Peak; Inflation Slows

The European Central Bank (ECB) raised its key interest rate by half a percentage point (0.50%) to 2.00%. Although the increase marked a slowdown from the two previous rate hikes, ECB President Christine Lagarde said rates “will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive” to bring inflation back down to the 2% target. The ECB also said it plans to shrink the portfolio accumulated as part of its Asset Purchase Programme. This process will begin in March.

Annual inflation in the eurozone decelerated in November for the first time in 17 months. Smaller increases in energy and services costs helped push consumer price inflation down more than expected to 10%, compared with a record high of 10.6% in October. Eurozone business activity shrank for a sixth consecutive month in December, although at a slower pace, preliminary results from a survey of purchasing managers showed. S&P Global’s flash composite Purchasing Managers’ Index (PMI) ticked up to 48.8—a reading that was still in contractionary territory
(below 50).

BoE Raises Key Rate for Ninth Time; Inflation Slows but Growth Outlook Worsens

The Bank of England (BoE) hiked its key interest rate by one-half of a percentage point—the ninth consecutive increase—to a 14‑year high of 3.5%. The Monetary Policy Committee said “further increases” may be required to quell inflation. Governor Andrew Bailey noted in a letter to finance minister Jeremy Hunt that UK inflation may have peaked. The BoE also forecast that the economy would shrink 0.1% in the final quarter of the year, less than its November estimate, which had called for a 0.3% contraction.

UK inflation slowed from a 41-year high to 10.7% in November as motor fuel prices pulled back. However, other data showed signs of economic weakness. Gross domestic product shrank 0.3% sequentially in the third quarter—more than initially estimated—accompanied by a sharp contraction in business investment and a pronounced slowdown in the housing market. The jobless rate crept up to 3.7% in October from 3.6% in September.

Swiss, Norwegian Central Banks Raise Rates


Central banks in Switzerland and Norway indicated that rates would need to rise for longer than markets had previously hoped. The Swiss National Bank raised its benchmark interest rate by one-half of a percentage point to 1.0%. “It cannot be ruled out that further increases will be necessary,” Chairman Thomas Jordan said. Meanwhile, Norges Bank increased its key rate by a quarter of a percentage point to 2.75% and signaled that the central bank would “most likely” raise it again in the first quarter of 2023.


Japanese equities had a weak December, with the MSCI Japan Index falling 5.2% in local currency terms. Risk appetite suffered as the U.S. Federal Reserve presented a more hawkish‑than‑anticipated monetary policy outlook and concerns grew that continued tightening by the major central banks could push the global economy into recession.

The Bank of Japan (BoJ) surprised markets in the latter half of the month by announcing that it would modify its policy of yield curve control (YCC), allowing 10-year Japanese government bond (JGB) yields to rise as high as 0.50%, doubling its prior implicit cap of 0.25%. Most market participants had not expected a shift in the BoJ’s YCC until 2023. As a result, the JGB yield finished December at around the 0.42% level, up sharply from 0.25% at the end of the prior month. BoJ policy developments also lent support to the yen, which strengthened to about JPY 131.13 against the U.S. dollar, from approximately JPY 138.09 at the end of November.

BoJ Surprises Markets With Earlier‑Than-Anticipated Monetary Policy Tweak

Market participants had widely expected the BoJ to maintain its monetary policy settings at its December meeting. Indeed, the central bank kept its ultralow benchmark interest rates unchanged. However, the decision to modify its YCC policy and double the range within which JGB yields can fluctuate—to one-half of a percentage point on either side of zero percent—came as a surprise. In its Statement on Monetary Policy, the BoJ cited the desire to improve market functioning and encourage smoother formation of the entire yield curve, while maintaining accommodative financial conditions.

Building inflationary pressures—nationwide core consumer price inflation rose 3.7% year on year in November, driven by higher prices of processed foods—are a factor that could drive the BoJ toward more fully fledged monetary policy tightening, akin to that currently pursued by the other major central banks. BoJ Governor Haruhiko Kuroda reiterated late in the month that the central bank does not intend to alter its long-standing stance of easy monetary policy. However, with his term ending in 2023, speculation is rife about the degree to which his successor will pursue policy continuity.

Third-Quarter Economic Contraction Smaller Than Initially Estimated

Data from the Cabinet Office confirmed that gross domestic product shrank an annualized 0.8% in the third quarter of the year, less than the 1.2% contraction indicated by initial estimates. While historic yen weakness has adversely affected trade, stronger-than-anticipated exports mitigated the impact.

Separate PMI data showed that Japan’s services sector expanded in December while manufacturing contracted. Growing tourism volumes boosted demand for services, and firms saw their pricing power increase. This was against the backdrop of easing COVID concerns, which supported consumer confidence. Conversely, manufacturing firms suffered amid muted customer demand, with both output and new orders across the sector in decline.


Chinese stocks rose as Beijing’s rapid easing of coronavirus pandemic restrictions raised growth expectations, but a surge in infections dampened investor sentiment. The MSCI China Index advanced 5.2% while the China A Onshore Index added 1.8% in U.S. dollar terms.

Chinese officials abandoned the country’s zero-COVID approach after the government announced a 10-point guideline to new coronavirus prevention and control measures. Later in December, the National Health Commission (NHC) downgraded the management of the virus from the highest to second-highest level starting January 8, 2023. While China will continue to focus on vaccinating the elderly and ensuring the availability of medical treatments, it will lift almost all standard restrictions, according to the NHC. The commission also said it would stop publishing daily coronavirus case numbers after many questioned the reliability of the NHC’s data.

China’s government stepped up calls to bolster the economy in 2023 following the Central Economic Work Conference, an annual meeting in which officials discuss policy goals for the coming year. The State Council urged the implementation of its previously announced stimulus measures to continue easing restrictions and make existing policies more effective. Meanwhile, China’s securities market regulator outlined policies intended to help the beleaguered property sector, including allowing qualified real estate developers to secure backdoor listings via other listed companies.

The People’s Bank of China issued a statement pledging to support a recovery in consumption and guide financial institutions to back property sector mergers and acquisitions. In mid‑December, the central bank injected a higher-than-expected CNY 650 billion into the banking system through its one-year medium-term lending facility (MLF) to ease stress on credit markets, marking its first cash injection via the MLF since March.

Economic Data Remain Weak, but Activity Rebounds

China’s exports fell by 8.7% in November from a year earlier, marking the steepest monthly drop in exports since February 2020 amid weaker global demand. The official PMI readings for manufacturing and nonmanufacturing both weakened in November below economists’ forecasts and remained under 50, the level separating growth from contraction, as coronavirus outbreaks curtailed activity.

However, economic activity picked up in several Chinese cities where infections showed signs of peaking. The number of passengers using subways in Beijing, Chongqing, Chengdu, and Wuhan rose by 40% to 100% as residents returned to normal activities. Reports also indicated an increase in traffic congestion, movie sales, and air travel in some areas.

Other Key Markets

Political Volatility Drags Stocks Lower in Peru

Stocks in Peru, as measured by MSCI, returned -8.29% versus -1.35% for the MSCI Emerging Markets Index. 

It was a volatile month for Peruvian assets. In early December, President Pedro Castillo called for the immediate dissolution of the unicameral legislature—a move that T. Rowe Price emerging markets sovereign analyst Aaron Gifford considered a desperate attempt by the president to avoid another impeachment effort by Congress, the third since he took office in July 2021. Castillo’s plan was to impose a temporary curfew, call for early elections, and rule by decree in the interim. After new elections, the new Congress would have been given the powers to create a new constitution within nine months.

In response to what critics called a “self‑coup” attempt, most of Castillo’s cabinet resigned, and Congress accelerated his impeachment. In addition, the Peruvian constitutional court ruled that Castillo was no longer the country’s president, and police forces detained him. Vice President Dina Boluarte was quickly sworn in as president and, in an attempt to provide reassurance to the public, spoke about her intent to create a national unity government, fight “shameful” corruption, and respect the independence of both the police and the military.

In response to violence, protests, and major roadway blockages scattered throughout the country, Boluarte’s government declared a nationwide state of emergency that suspended certain rights and liberties for a period of 30 days. Also, Boluarte’s new finance minister, Alex Contreras, announced a significant plan to help the economy recover from these disruptions, targeting regions of Peru that were most affected by roadblocks.

Brazilian Equities Decline Despite Reduced Uncertainty

Stocks in Brazil, as measured by MSCI, returned -2.87%. Although equities declined, investors were encouraged by a reduction of the political and economic uncertainty that had prevailed for weeks following the narrow late-October victory of former president Luiz Inácio Lula da Silva (Lula) over incumbent Jair Bolsonaro in the presidential election.

One major source of uncertainty was that Lula, who was scheduled to be inaugurated on January 1, 2023, delayed the announcement of his cabinet member choices until after returning from a climate change conference and recovering from throat surgery. In mid-December, Lula confirmed that he would select Fernando Haddad—a former mayor of Sao Paulo, Mminister of education, and presidential candidate—to be his administration’s finance minister. Haddad is not perceived as being market-friendly, so it could take some time for him to build credibility with investors. Toward the end of the month, Lula announced the remainder of his cabinet members, including former Environment Minister Marina Silva, who would return to the same post she held for most of President‑elect Lula’s previous presidency, and market‑friendly Senator Simone Tebet, who will head the Planning Ministry, which will play a role in budget formation and execution. In addition, several other cabinet members were from more moderate political parties.

Another major source of uncertainty was how Brazil’s mandatory spending cap could be affected by efforts spearheaded by Lula’s transition team to boost the government’s social spending. During the month, the legislature passed a constitutional amendment that temporarily waives the spending cap—which has enforced several years of fiscal discipline by restricting growth in the federal budget to the rate of inflation—so that the government can fund such spending.

The final legislation will allow for up to BRL 168 billion in spending above the cap for one year, with a portion of this spending tied to tax receipts. The original proposal for the spending cap waiver was larger in size and would have been effective for two years. While the new spending is larger than it would have been had the spending cap remained in effect, T. Rowe Price sovereign analyst Richard Hall notes that the increase in spending levels is not as large compared with final 2022 spending, as Congress had authorized spending above the cap this year as well. New finance minister Haddad has promised to send a proposal to Congress in the first half of the year for a new fiscal rule to replace the spending cap.

Major Index Returns

Total returns unless noted

Major Index Returns Chart

Past performance is not a reliable indicator of future performance.

Note: Returns are for the periods ended December 31, 2022. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group, Bloomberg Index Services Limited, MSCI, Credit Suisse, Dow Jones, and J.P. Morgan (see Additional Disclosures).


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