The primary questions on the minds of investors this year was whether major global central banks are nearing an end to their rate hike cycle, and if they are pivoting away from aggressive monetary policies.
But the conviction in market bets for an end to global rate increases has faded quite quickly.
"Through the recent gyrations, markets seem to lack the conviction needed to push new lows in rates," said Padhraic Garvey, ING regional head of research for Americas.
"Not enough conviction to call time on inflation," he added.
The biggest fear is that central banks may be forced to keep their foot on the rate accelerator on growing expectations of solid demand in the world's second-largest economy and rekindling elevated inflation.
China's Big Recovery
China has completely moved away from its zero-covid policy and removed mobility restrictions.
That is driving expectations for a sudden boost to activity in China and, in turn, projections for a spike in energy prices.
Those concerns come just when the Federal Reserve and other major central banks have succeeded in putting out the price pressures fire. At least in bringing surging inflation down from multi-year highs.
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The reopening of China is expected to offset Europe's economic weakness and the impending U.S. recession, giving the global economy a much-needed lift.
However, there is a catch in 2023, unlike in 2009, when China's stimulus programme helped jump-start a global recovery from the Lehman crash.
The timing of China's turnaround may flip the switch back on inflation this time.
For this reason, Kristalina Georgieva, the president of the International Monetary Fund, cautioned last month about the potential effects of China's shift away from covid zero on inflation while stating that it is likely to be the single most important factor helping global GDP in 2023.
"What if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?" she said at the World Economic Forum in Davos.
China Growth vs. Global Inflation
China's GDP will increase from 3% in 2022 to about 6% in 2023, according to economists in business surveys from Reuters and Bloomberg.
According to an analysis of the relationship between China's economic development, energy prices, and worldwide inflation, consumer prices in developed economies may increase by about a full percentage point in the last quarter of 2023.
That increase would be closer to two percentage points if China excels, with GDP rocketing to over 6.5%.
"China's recovery, while much needed, for a gloomy global backdrop, will push global inflation back up," said a fund manager at a boutique investment management firm in London.
Are Central Banks Behind the Curve?
The pandemic support with ultra-easy monetary policy went on for a little too long despite a surge in inflation, which most central banks said was only "transitory" in 2021.
The tone of the central banks changed at the turn of the year with warning shots of prolonged price pressures back then.
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And now they say elevated inflation is here to stay longer than what markets expect.
Referring to global central banks' expectations on inflation back in 2021 and now, a chief investment officer at a large US investment firm in Boston said, "Were they wrong then? Yes indeed. Are they wrong now? Of course."
"The risk is central banks have been playing catch up with the timing on rate decisions and change in policy stance and will continue to do so," he added.
The supply side has driven the global surge in inflation. Inflation spiked from the pandemic-led supply distortions, which got disrupted further by the war on the edge of Europe.
The Russia-Ukraine war shows no signs of abating. And if anything, the crisis is escalating further, which is also likely expected to fuel a spike in commodity prices.
The demand from commodities-guzzling China will only add to the price surge.
Indeed, another significant market shift is the increase in oil prices due to the continued concerns about supply and confidence in China's improving demand.
While cryptocurrencies have had a positive start in 2023 so far, the changing landscape of inflation outlook and central banks' action can put that rally in jeopardy.
Last year, digital assets and assets considered risky bets took a significant hit from surging inflation and aggressive interest rate hikes by the Federal Reserve.
If that narrative on elevated inflation continues, then the course of moves in digital assets can be swayed back to trade in the red.