Week Watch 09/01/23

After a tough 2022, markets greeted 2023 with a strong first week back, after positive data from Europe and the US encouraged an improved sentiment.

European indices were the strongest performers among the major equity markets last week, with the French CAC 40 and German DAX 30 rising by 6.0% and 4.9% respectively. These were supported by headline CPI inflation figures, which dipped back below the 10.0% mark for the first time in two months, lifting hopes that the peak may now be behind us.

Given the ongoing war in Ukraine, along with Russian sanctions, European economies benefitted from the mild winter. This meant less natural gas was used than might have otherwise been the case, helping keep gas prices down on the Continent, which benefitted wider equity markets during the week.

If inflation were to ease in 2023, it would help the European Central Bank to strike a more conciliarity tone when discussing interest rates in the future, which would also help equities recover.

Meanwhile, US equities were helped by solid job figures. The country added 223,000 jobs in December, above general expectations, while average hourly earnings rose by less than in previous months.

These combined to give the impression of a healthier-than-expected economy, and while the low unemployment rate means the job market will remain tight, Andrew Hunter, Senior US Economist at Capital Economics, noted: “The softer gain in average hourly earnings suggests wage growth is nevertheless slowing and we still think the labour market will weaken more markedly this year.”

All in all, this data encouraged thinking that a soft landing for the economy could still be achieved as the Federal Reserve continues along its tightening path.

Although both the S&P 500 and NASDAQ grew last week, the coming week will see December’s inflation figures released for the US, which could have a big impact on how long this recovery lasts. It is expected to have fallen to 6.5% in the month.

Encouraged by wider market sentiment, the UK’s FTSE 100 also jumped 3.3%, despite a series of strikes and ongoing economic uncertainty. Monthly GDP from the Office for National Statistics will be released on Friday, with the economy forecast to have contracted by 0.3% back in November.

Turning to Asia, one of the key stories from the New Year break was the most recent outbreak of COVID-19 in China. Towards the end of 2022, China had moved away from its zero-COVID policy, reopening much of the economy. While this has seen the recent surge in cases, China reopening has generally been seen as a positive step for both the Chinese and wider global economies.

All this led to a positive start to the year for global equities. However, Mark Dowding, Chief Investment Officer at BlueBay, questioned whether this is the start of a trend that can shape the landscape in the year ahead, or a shorter-lived period of respite amid a policy-tightening that will continue to negatively affect prices.

“Listening to central bankers, it strikes us that we may be nearing the top of the hiking cycle within the next few months. Policy-tightening is gaining traction and inflation should continue to moderate through the course of the year, on both sides of the Atlantic. However, with labour markets remaining tight, there is ongoing anxiety that pressure on wages could continue to be a factor that drives up prices in the quarters to come,” Mark noted.

For this reason, it will be worth paying attention to the language used by central banks when announcing future rate changes for indications of future moves. Although inflation now appears to be falling in the West, it remains well above the 2% target of most central banks.

Although 2023 got off to a strong start, a year is a long time in financial markets, and a good start to the year shouldn’t hide that there remain significant economic challenges.

BlueBay is a fund manager for St. James’s Place.

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