Global Stocks Fall on Inflation, China’s Economy May Show Improvement
Last Week Review
Global equities fell 2.6% last week, with all major regions declining. In the U.S., strength in the services sector and a hotter-than-expected inflation indicator helped fuel expectations of higher interest rates. The two-year Treasury yield rose 0.20% and the 10-year yield increased 0.13%. Investment grade and high yield credit spreads widened last week, but they still are lower for the year.
Inflation Indicator Shakes Market
The core Personal Consumption Expenditures Price Index in January rose 4.7% year-over-year, higher than the expected 4.3% and December’s 4.6%. In reaction, Treasury yields rose and equities declined as Federal Reserve rate hike expectations increased. Fed minutes of its last meeting, released earlier in the week, noted that “a few participants” preferred a 0.5% hike instead of the 0.25% increase announced. Investors now expect a 0.25% hike at each of the next three Fed meetings for a peak federal funds rate of around 5.4%.
Strong Services Sector May Support More Rate Hikes
U.S., Europe and Japan showed an acceleration in services but ongoing weakness in manufacturing, according to Flash Purchasing Managers’ Index reports. The resilience in services activity is feeding into the narrative that stronger-for-longer growth may require a more forceful response from central banks to head off inflation. Japan, however, remains an exception with tamer inflation and its yield curve control policies in place. The Bank of Japan’s newly nominated governor did not offer any concerning views on yield curve control during confirmation hearings last week.
Russia-Ukraine War Hits One-Year Mark
February 24 marked one year from the start of the Russia-Ukraine war. Throughout the year, crude oil prices rose from roughly $90 to a peak of above $120 before declining to $75 on Friday. While energy prices have cooled, the war’s impact on inflation still reverberates globally. With no near-term resolution in sight, the war could escalate and increase investment risk.
U.S. Retail Earnings Send Mixed Signals
Walmart’s (WMT) earnings topped expectations but the company provided a cautious outlook, and Home Depot’s (HD) sales and financial outlook fell below expectations. Consumers continue to spend, but the outlook is uncertain. U.S. fourth-quarter earnings fell 4% year-over-year and sales grew 5%, with 94% of companies in the S&P 500 Index reporting. Generally, fourth-quarter earnings failed to inspire investors.
This Week Preview
China’s Economy May Show Signs of Surge
The Purchasing Managers’ Index report for China is projected to show expansion. China’s economic activity continues to improve, though equity prices may already reflect a fair share of the surge. China’s equities have outperformed the U.S. by more than 35% since bottoming last October.
U.S.’s Biden and Germany’s Scholz Scheduled to Meet
U.S. President Joe Biden is scheduled to meet with German Chancellor Olaf Scholz on Friday, with the war in Ukraine a likely topic. Last week, China published a document that encouraged peace talks while criticizing actions by the U.S. and Europe against Russia.
Target and Kohls to Report Earnings
Target (TGT) and Kohls (KSS) may offer additional context on retail spending trends when they report on Tuesday and Wednesday, respectively. While there has been some recent optimism on consumer resilience, companies’ financial guidance generally has cast doubt on the outlook.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of February 26, 2023.
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