A Rising Tide
The start of 2023 was a positive one for most asset classes. The rising tide rally in risk assets that commenced in mid-October 2022 stalled in December, but returned in January floating all boats. While debates continued as to whether the developed economies of North America and Europe are in, or will see, a recession this year, the slew of data evidencing slower economic growth and importantly, an easing of inflation pressures, boosted financial markets. China’s reopening of its economy provided a further positive influence for global financial markets. As highlighted by the International Monetary Fund (IMF) at the end of January, even the UK’s own specific issues didn’t prevent UK equities and bonds from participating in a strong month for most asset classes.
Barely a day went by without an announcement from an investment bank or tech company that they were laying off large numbers of employees. Other industries seemed keen to hang on to theirs, cognisant of the problems in hiring in the post pandemic period. This so-called hoarding of labour has made analysing the unemployment data (a lagging indicator) even trickier. Of course, what concerns central banks and their stewardship of monetary policy is wage pressure. The release in the US of its Employment Cost Index for December brought some better news for the US Federal Reserve as employment costs slowed by more than forecast, as the following graph from Bloomberg illustrates:
Much attention was given to quarterly earnings announcements, not least given the optimistic broker or ‘street’ estimates. A mixed picture ensued, probably better than many outside the ‘street’ expected, but those that missed forecasts and reported a weak outlook fell.
The Ceiling’s the Limit
Or is it? The impending limit to the US debt ceiling, caught up in the political battle between Republicans and Democrats, had little impact on financial markets. Whether that remains the status quo remains to be seen.
The doomsayers of Europe’s economic prospects had to have a slight re-think. The seasonally warmer winter in Europe coupled with better storage of natural gas has helped to ward off the economic calamity many forecasters had predicted. Europe even managed to report a positive economic growth output in the final quarter of 2022, albeit only just at 0.1% according to Eurostat. Notwithstanding the benefits to lower inflation and businesses from substantially lower natural gas prices (see below chart), the European Central Bank (ECB) are firmly in tightening mode as regards interest rate policy:
It was a good month for debt markets with ten year UK Gilts and ten year US Treasuries down by over 0.30% in yield over the month. But at 3.30% and 3.50% respectively, yields look skinny even given the improved inflation outlook. Here is a snapshot of UK inflation from Bloomberg:
In the US, there was an update of the Federal Reserve’s favoured measure of inflation, the personal consumption expenditure deflator which came in at 4.4% for the year to end December 2022, lower than November’s reading.
Euro-area inflation also cooled to 8.5% from 9.2% with core inflation at 5.2%. So a positive backdrop for bonds but prices reflect much good news after January’s rally.
Credit markets favoured investment grade credits over high yield.
Regionally, Asia led the pack buoyed by China’s re-opening. Within regions, US smaller companies led the way in North America. In the UK, mid-caps took over market leadership. A number of commentators referred to the comeback of ‘emerging markets’ but the reality is that China was the dominant positive influence, being the leading country performer; its index being up over 8.5%.
Thematically, energy transition continues to deliver – almost matching China’s monthly returns. Materials was a star performing theme, up over 11% in January. Perhaps the surprise package among the sectors was Technology, almost matching Materials’ outcome in January. A strong month for global equities.
Copper had a good month, aided by prospects of greater demand from a re-opening Chinese economy. Nickel, another metal with long term demand, fared less well after a major rally in the final quarter of 2022. The oil price ebbed and flowed over the month but essentially ended where it started. Soft commodities were marginally firmer in January.
Weaker US economic data leading to the prospect of fewer or smaller official rate increases in the US led to a slightly weaker US currency in January. Despite relatively weaker economic activity in the UK, sterling was only marginally weaker than the Euro. After a turbulent and damaging November and December thanks to FTX, cryptocurrencies had something of a surge in January.