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Global Stocks Rise, U.S. Jobs Report Likely to Show Continued Strength
Last Week Review
Global equities rose 1.9% last week, providing some relief from a tough February. U.S. stocks led with a 2% return followed by developed ex-U.S. equities with a 1.8% gain while emerging market equities increased 1.6%. Treasury yields rose some while credit spreads slightly tightened.
February Recap: Global Equities Fell on Interest Rate Worries
Global equities lost 2.8% in February with weakness across all major regions. The two-year Treasury yield rose 0.61% and the 10-year yield increased 0.41%, notably higher than the beginning of the year after they declined in January. The strong U.S. labor market and hotter-than-expected inflation led to expectations of more rate hikes by central banks. Investors projected a peak federal funds rate of about 5.4% at the end of the month versus 4.9% at the beginning of the month. Investors no longer expect rate cuts in the back half of 2023, based on futures trading. While the expectations of higher rates weighed on returns, global equities still have gained for the year with a strong January.
High European Inflation May Spur ECB Rate
Europe’s flash core Consumer Price Index rose 5.6% year-over-year, higher than expected, as lower energy prices and strong labor markets likely supported consumer spending. With the high inflation, investors expect higher rates from the European Central Bank, with the expected peak policy rate now at 3.9% versus 3.5% at the start of this year. In the U.S., investors responded positively to comments from Atlanta Fed President Raphael Bostic that a summer pause is possible. However, he also noted that the strong economy may cause a higher peak rate. His comments didn’t indicate major changes in policy.
China’s Economy Picking Up, Could Influence Global Growth
China’s manufacturing and non-manufacturing sectors are expanding, based on the Purchasing Managers’ Index report released last week. China’s reopening is supporting domestic and global growth, but concerns on the durability of this strength remain. In the U.S., the final Purchasing Managers’ Index report showed services strength but manufacturing weakness, consistent with the preliminary report on the index.
Fourth Quarter Earnings Fail to Inspire Investors
Fourth-quarter earnings decelerated across most major regions. In the U.S., earnings of companies in the S&P 500 Index fell about 5% year-over-year, though sales rose about 5%. While sales and earnings growth exceeded expectations by 1% to 2%, they historically exceed estimates by a higher margin. Energy companies significantly supported the aggregate results. Excluding the energy sector, U.S. earnings would have fallen about 7% and sales would have declined about 3%. Further, five times more companies provided negative outlooks than positive for the first quarter.
This Week Preview
Fed to Watch Jobs Report Closely
The February U.S. jobs report is scheduled to be released on Friday. Expectations call for 215,000 jobs added. That still would indicate a solid labor market but the estimate falls well under the 517,000 jobs added in January that triggered expectations of higher rate hikes from the Fed. Wage growth is expected to accelerate to 4.7% year-over-year from 4.4% in January and the unemployment rate is expected to remain low at 3.4%. We expect the Fed to watch the jobs report closely, in particular wage growth given its correlation with inflation in services industries.
Fed’s Powell to Deliver Report to Congress, Other Central Banks to Announce Policy Decisions
Fed Chair Jerome Powell will deliver his semiannual report to Congress on Tuesday and Wednesday. His speeches come ahead of Friday’s jobs report and other releases of key economic indicators. Elsewhere, several major central banks are scheduled to announce policy decisions throughout the week, including Australia on Tuesday, Canada on Wednesday and Japan on Friday.
China May Release Economic Targets and Stimulus Plans
China’s Two Sessions meeting and National People’s Congress kicked off over the weekend, which may result in releases of economic targets and stimulus plans that investors are likely to follow closely. In the U.S., President Joe Biden is expected to release his fiscal year 2024 budget request. This may spur a Republican reaction and focus investor attention on debt ceiling risks.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of March 5, 2023.
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