2023 has started the year with equity markets rising, bond yields falling, and the U.S. dollar weakening, very different to the trends that prevailed in 2022. This week’s all important U.S. inflation release for December provided further evidence that the Federal Reserve’s efforts are working against inflation.
Consumer prices rose by 6.5% in December (year-on-year), marking the slowest inflation rate in more than a year, which is a small but necessary step towards easing some of the pressures. Core inflation, which excludes food and energy, was up 5.7% over the same period, also the smallest advance in a year. The figures, which matched forecasts, puts the Fed on track to downshift to smaller interest-rate increases, raising hopes for a soft landing for the U.S. economy.
Fed officials however continue to talk up interest rates. This week, two Fed officials made the case for pushing rates higher. Raphael Bostic said that he favours getting the benchmark to 5.00 – 5.25% before taking stock. Mary Daly gave a similar prediction, though she’s uncertain where exactly the peak will be. The central bank could hike by either 25 bps or 50 bps in February, she told the WSJ.
The World Bank cut its growth forecasts for most countries for 2023 and warned that any new adverse surprises could tip the global economy into a recession. The World Bank expects global growth to increase by 1.7% this year, about half the pace forecast in June.
U.S. 4th quarter earnings season kicked off this week, with major banks including JPMorgan, BofA, Citi and Wells Fargo all reporting. Results were mostly positive, with JPMorgan, BofA and Citi beating earnings estimates. A common trend across all results saw banks bolstering net reserves, showing concerns around the 2023 macroeconomic outlook.
In China, the Covid surge hasn’t deterred Lunar New Year travel, which bounced 40% year-on-year in the first two days of the rush, according to government data. Data reported during the week saw Chinese exports decline by -9.9% (estimated -11.1%) and imports decline by -7.5% (estimated -10.0%) in December. Consumer prices rose by 1.8% on a year-on-year basis, in line with market expectations.
Interestingly, experts believe that China’s population probably shrank in 2022 for the first time in decades. A combination of record low births and increased deaths, partly due to Covid, suggest that the country could slip behind India as the most-populous nation in 2023, and its economy may struggle to overtake the U.S. in size. Official birth data is due next week.
UK GDP expanded by 0.1% in November, beating estimates for a 0.2% contraction. This upside surprise fuelled expectations that the economy might avoid a recession. The Office for National Statistics said that the economy would have to shrink by 0.5% in December to record a second quarter of economic contraction.
In the eurozone, the unemployment rate remained unchanged at 6.5% in November, in line with market expectations. Investor morale improved, with the economic sentiment index reaching its highest level since June last year but remains in negative territory.
Core inflation in Tokyo rose by 4.0% (year-on-year) in December, the fastest rate in 40 years, leading to speculation that the Bank of Japan (BoJ) could revise up its inflation forecasts and assess the viability of further monetary policy adjustments at its next meeting. The BoJ was again forced to conduct unscheduled bond-buying operations to keep the 10-year Japanese government bond yield around its new 0.50%.
It was a strong week for global equity markets. In the U.S., the Dow Jones (+2.00%), S&P 500 (+2.67%) and Nasdaq (+4.82%) all ended the week higher. Similarly, the Euro Stoxx 50 (+3.31%) and FTSE 100 (+1.88%) were positive. In Asia, the Nikkei 225 (+0.56%), Hang Seng (+3.48%) and Shanghai Composite Index (+1.19%) also ended the week higher.
Market Moves of the Week:
Eskom Holdings SOC Ltd. has won approval to increase tariffs by 18.65%, the most in more than a decade, despite the power utility saying it’s still below what is needed to help limit worsening power cuts. The utility had applied for a price increase of 32% to pay for more purchases from independent producers as it struggles to meet demand.
Following on from last week’s ANC meeting where policies were discussed, resolutions have alluded to a greater focus on job creation by the South African Reserve Bank (SARB) but stopped short of calling for its mandate to be changed. South Africa’s unemployment rate, which officially stands at 33%, is among the world’s highest.
The JSE All-Share Index (+3.22%) posted strong gains this week, reaching new all-time highs. Strong performances came from all three of the major sectors including resources (+3.64%), industrial (+3.21%) and financial (+3.17%) sectors. By Friday close, the rand was trading at R16.85 to the U.S. Dollar, appreciating by +1.08% for the week.
Chart of the Week:
The chart breaks down inflation into food, energy, and remaining goods and services. The inflation shock was initially driven by goods prices and energy but has now migrated to services (which includes the cost of shelter), along with erratic cost of food. Source: Bloomberg.
Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.