Today's Markets: More questions than answers at the start of 2023

The FTSE 100 was the best performing major benchmark through 2022 and it’s got off to a good start this year, up 2.6 per cent since the UK returned to work on Tuesday – well, most of the UK. Always best not to read too much into performance at the start of any year, but any positivity does mean the likely course for interest rest is more difficult to determine than it was at this point last year. 

UK interest rates could peak at 4.25 per cent in March, but we should keep in mind that the inflationary effects over the past 15-months were mainly driven by supply-side effects – and whether these will dissipate this year is open to question. 

US Federal Reserve officials remain hawkish ahead of any evidence of a sustained fall in inflation. But it’s worth remembering that “left-field” events have often followed periods when central banks have tightened the spigot, although that may be confusing cause and effect. At any rate, central banks have also embarked on tapering programmes by stopping issuance or declining to roll-over long-dated debt. As our banking correspondent, Julian Hofmann, recently noted, this could have a profound effect on market liquidity going forward. 

The Bank of England has been pursuing this agenda for just under a year and just as the impact of quantitative easing (QE) varied greatly between the different rounds after inception, the economic impacts of the opposite course should vary significantly over time. QE increases the price of financial assets other than bonds, such as shares, so the change of tack by central bankers will continue to influence stock market valuations through the remainder of this year and beyond – only the degree is open to debate. It could be that the bulk of the “foolish money” ended up supporting high-growth sectors, in which case the FTSE 100’s outperformance shouldn’t surprise anyone. You can read more on that here.