Jerome Powell surely has a holiday wish list, especially facing a new year of slower growth, rising prices and inverted yield curves.

The recession will be painful, but the “old continent” is proving surprisingly adept at facing new challenges

A downside surprise in U.S. CPI led to a market rally amid hopes of a Fed pivot. Meanwhile, U.S. midterm elections suggest a divided Congress is ahead. Elsewhere, eyes will be on the U.K. Fiscal Statement next week.

While the COVID-19 pandemic disrupted global food markets, the Russian invasion of Ukraine has delivered a much bigger shock that has since been aggravated by drought and food export restrictions. However, some relief is possible if market forces are allowed to work again.

It’s more or less clear where investors think the world is headed, but they are surely missing something.

After an initial dovish reading of the FOMC statement, Jay Powell’s tone was firmly hawkish and led to a reversal in risk sentiment and a higher market-implied terminal rate. While the BoE also hiked 75bps, the bank signaled a lower endpoint. All eyes are on inflation data next week.

Inflation is resilient and rates keep rising. Our central Stagflation Shock scenario, with persistent inflation and slower growth, continues to play out, though there is mounting evidence inflation may be resistant to policy tightening. Smaller hikes would indicate success, not a pivot in central banks’ resolve.

Over the next ten years, the proliferation of robots supercharged by AI should change the trajectory of productivity growth and help offset stark demographic headwinds most countries will soon be facing.

Investors navigating daily market volatility must come to terms with rising risks that we are entering a very different world.