Weekly Market Update: Global Equities Rise on Central Bank Meetings, Australia May Hike Rate This Week
Last Week Review
Global equities rose 1.0% last week, led by a 1.9% return in the U.S. during a busy week of central bank, economic and earnings developments. U.S. interest rates rose slightly but fell in the U.K. Credit spreads fell, including a 0.27% decline in high yield bond spreads.
A Strong Start for Stocks in 2022
Global equities posted a 7% gain in January, including modestly higher returns outside the U.S. versus U.S. equities. Moderating inflation, a decent near-term economic environment and a lack of incrementally hawkish central bank developments supported the rally. Tech-related sectors led with double-digit returns after lagging in 2022. For bonds, lower interest rates and credit spreads supported positive returns.
Central Banks Raise Rates, More Likely to Come
Three major central banks hiked rates last week. The Federal Reserve increased its rate by 0.25% while the European Central Bank and the Bank of England both hiked 0.50%. U.S. equities gained 2.5%, including a tech rally of about 5%, over the two-day period on Wednesday and Thursday when the banks held their meetings. U.S. yields declined by about 0.10% in the U.S. while European yields fell 0.20% to 0.30%. Fed Chair Jerome Powell’s comments largely stayed consistent with previous statements, pointing to a peak rate of around 5% and acknowledging moderating inflation. The European Central Bank guided towards another 0.50% hike in March. It likely has the most room to run in terms of more rate hikes compared to the Bank of England and Fed.
U.S. Job Gains Support Economy
The U.S. added 517,000 jobs in January, well above expectations for 185,000. The unemployment rate fell to 3.4% in January from 3.5% in December while wages grew 4.4% year-over-year. With the release of the jobs report on Friday, stocks fell about 1% and interest rates rose 0.15%, a partial reversal of market trends earlier in the week. The jobs growth supports a sound U.S. economy for the near-term, but we think investors will maintain focus on what the Fed may do in the second half of 2023.
Underwhelming Earnings from Big Tech
Key tech companies including Apple (AAPL), Amazon (AMZN) and Alphabet (GOOGL) reported somewhat weaker results. With about half of the S&P 500 Index companies reporting earnings, aggregate sales have grown 4.3% year-over-year, or 1.1% above expectations, and earnings have declined 5.3%, or 0.6% above expectations.
This Week Preview
Australian Central Bank May Hike Rates on Tuesday
The Reserve Bank of Australia is set to announce a policy decision on Tuesday, with investors anticipating a 0.25% hike. Elsewhere, the Fed’s Powell (Tuesday) and European Central Bank President Christine Lagarde (Thursday), along with other central bank officials, are scheduled to speak this week. We expect investors to monitor their comments for additional policy clues, reaction to movements in the stock and bond markets, and unexpectedly strong U.S. economic indicators.
BP, Walt Disney and Unilever Earnings
Scheduled earnings report this week include BP Plc. (BP) on Tuesday, Walt Disney Co. (DIS) on Wednesday and Unilever (ULVR) on Thursday.
Other Items: Inflation Indicators, EU Restrictions on Russian Oil Shipping
China is set to report on inflation on Thursday and the U.S. consumer inflation expectations report is scheduled to be released on Friday. The European Union restrictions related to the shipping of Russia’s refined oil exports, such as diesel, are scheduled to go into effect.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of February 5, 2023.
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