WEEK ENDED FEB 17, 2023
Inflation cuts both ways. On one hand, stubbornly high inflation is “Exhibit A” in support of a robust US economy, underpinned by a resilient U.S. labour market and consumers keen to get out their wallets and spend. On the other hand, as inflation only slowly and erratically declines, the possibility is increasing that it will become persistent and entrenched, resulting in a vicious circle that will make the journey back to the (Fed-coveted) 2%/annum inflation target much more difficult than risk markets are currently recognising. For most of the year, it seems that the majority of investors have been in the first camp, with risk spurred on the strong U.S. jobs market and American consumers spending, spending, spending! The Fed’s efforts to deliver some reality to markets has not worked, with promises from Mr Powell and his merry men about how the Fed is prepared to “fight inflation to the death” being summarily dismissed. Perhaps this week we reached an inflection point, although it is too early to tell. The first sign that the road ahead might not be as benign as thought came from the US Treasury market, which began to wobble a couple of weeks ago from a sequence of economic data releases suggesting that US economy is continuing to run hot. However, equities have scarcely flinched until a trifecta of hot CPI, retail sales and PPI reminded investors this week that the US economy remains too robust to suggest a quick and orderly decrease in inflation (which would then be followed a Fed pivot). There are other signs too of risk being reined in, including a (re)strengthening US Dollar. I still can’t shake the feeling that worse is yet to come. These periods of consolidation are never bad, and they can even result in opportunities for those that have been patient and are not faint of heart. Although the sell-off could broaden, it’s risky to bet against a bid for stocks surfacing fuelled by momentum investors and short-covering, as it has time and time again over the last several weeks. Just look at yesterday for example. The S&P 500 was drifting lower all morning and into the early afternoon, but then slowly found some support from dip buyers and began to claw back losses into the close, ending the day only marginally lower.
US equities have done well so far this year (S&P 500 +6.2% YtD), and equity markets in most other parts of the world have started strongly too. However, many of these economies face slightly different issues than the US:
Inflation is coming down rapidly in the U.K. and the jobs market seems firm for the moment, but there is an underlying sense of doom that is completely out of synch with the FTSE 100 soaring above 8,000 and Sterling anchored above $1.20/£1.00. I attribute the poor economic outlook (vis-à-vis other G7 peers) to a combination of the BREXIT-hangover and a smaller, less diversified economy (compared to the US and the Eurozone, for example). FTSE 100 +7.4% YtD.
In the Eurozone, the ECB is most certainly going to raise its key interest rates 50bps in early March, but the warmer-than-expected winter has meant high gas prices have not had the dampening effect on economic growth and corporate earnings that was expected just a few months ago. STOXX 600 +9.3% YtD.
The Bank of Japan will soon have a new leader (Kazuo Ueda), with many viewing this as the right time for the BoJ to begin to align its monetary policy with that of central banks in other developed markets. Nikkei 225 +5.4% YtD.
China remains the key for many developed economies given its size and relevancy, with a still-unclear picture of exactly how the recent lifting of the government’s COVID zero policies will spur the economy back to growth. Shanghai Composite +4.4% YtD.
MARKETS
Global equities were mixed this week, with European equities ending the week better but other markets – including US equities – faltering. The exceptions in US equities were the small-cap (value) Russell 2000 and the tech-heavy NASDAQ Composite, both green on the week, and both outperforming the DJIA and the S&P 500 YtD.
Comments from the Fed talking heads from the week before were given further credence this week by strong economic data in the US, including January retail sales. CPI for January was in line with expectations, but there were troubling trends in some of the components. PPI was above expectations, driving US Treasuries lower across the curve although they recovered some of their losses late in the week.
The USD continued to inch higher, now up slightly YtD. Oil gave back some of the gains realised at the end of last week when Russia announced it would reduce its daily supply. Bitcoin continues to benefit from the risk-on sentiment, in spite of a growing crescendo of regulatory concerns and infrastructure uncertainties.
See "The Tables" further below for updated data.
WHAT’S COMING THAT MATTERS
Monday is a holiday in the US, with stock and bond markets closed.
Economic data: Preliminary manufacturing, services and composite PMI data for February will released for the Eurozone, UK and US on Tuesday. The minutes from the last FOMC meeting – always heavily scrutinised – will be released on Wednesday. US 4Q22 GDP will be released on Thursday. On Friday, the Fed’s preferred measure of inflation in the form of Personal Consumption Expenditures (PCE) will be released, along with January new home sales and the Michigan Consumer Sentiment index.
S&P 500 earnings: 62 additional S&P 500 companies will report earnings this week, including: Home Depot, Walmart, NVIDIA, Rio Tinto, BHP and Alibaba.
Upcoming central bank monetary policy meetings:
Federal Reserve – Mar 21st-22nd and May 2nd-3rd
Bank of England – Mar 23rd and May 11th
ECB – Mar 23rd and May 4th
Bank of Japan – Mar 9th-10th and Apr 27th-28th
THE TABLES
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and o: xx62 additnal S&P 500 companies will report earnings this week, including: xxx
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