Global Stocks Gain on U.S. Rise, China May Report Deflation
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Last Week Review
Global equities rose 0.9% last week on the back of a 1.2% gain for the U.S. while non-U.S. stocks were flat. After declining for most of the last week, Treasury yields charged upward last Friday on the heels of a strong U.S. jobs report. The two-year yield rose 0.01% and 10-year yield fell 0.12%. Investment grade bonds returned 0.6%.
Fed Casts Doubt on Rate Cut in March
The Federal Reserved maintained its policy rate at last week’s meeting, but the Fed’s Federal Open Markets Committee removed from its statement following the meeting indications of a bias toward increasing rates. Nonetheless, Fed Chair Jerome Powell noted that the Fed wants more confidence that inflation is falling sustainably before cutting rates and he does not think policymakers will reach that level of confidence by March. The Bank of England also kept its policy rate unchanged. The decision included one member voting for a rate cut and two voting for a rate hike. Like the Fed, the Bank of England said they wants to see more progress on inflation before cutting rates.
January Jobs Report Tops Expectations
In January, the U.S. added 353,000 jobs, with strong upward prior-month revisions. Wages rose 4.5% year-over-year from a 4.1% increase in December and the unemployment rate held at 3.7%. The strong jobs market argues favorably for continued economic growth, likely reduces the urgency of Fed rate cuts and poses some risk to continued inflation progress. Other economic data was also firm last week, including higher-than-expected manufacturing and eurozone inflation.
Big Tech Earnings Support Sentiment
Five of the so-called companies reported last week. Overall, earnings amongst this group grew at a solid pace, and weekly gains for most of the companies supported broader index returns. Outside of big tech earnings, regional banks garnered a lot of attention. Fears of systemic risk in the commercial property sector rekindled after New York Community Bancorp reported significant losses from its commercial real estate portfolio. The Regional Banking Index suffered the largest single-day decline since Signature Bank (which New York Community Bancorp acquired) collapsed last March.
January Results Flat
In January, global stocks gained 0.6% and investment grade fixed income lost 0.3%. Oil stocks (+6%), the U.S. dollar (+2%), and U.S. equities (+1%) produced gains while most other major asset classes were flat-to-down. China equities fell 11%, weighing on the broader emerging markets loss of 4%.
The Purchasing Managers Index, a series of monthly reports by the Institute for Supply Management, is a survey of purchasing and supply executives on business activity for services and manufacturing. The reports provide insight on the direction of the economy.
The “Magnificent Seven” companies are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, which drove the sharp rise in U.S. stocks in 2023.
This Week Preview
Deflation Expected in China
Estimates show potential deflation of 0.5% year-over-year in China, based on the Consumer Price Index scheduled for release will be released this week. The Producer Price Index also is expected to fall 2.6%. China’s mainland markets will be closed on Friday and the following week for the Lunar New Year.
Caterpillar, Disney and Pepsico to Report Fourth Quarter Earnings
Earnings reports scheduled this week include Caterpillar (CAT) on Monday, Eli Lily (LLY) on Tuesday, Disney (DIS) on Wednesday and PepsiCo (PEP) on Friday. For S&P 500 Index companies in the fourth quarter, investors expect sales to rise 3.5% and to gain 1.5%.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of February 4, 2023.
Earnings Momentum from So-Called 'Magnificent Seven'
While markets finished flat for January, global stocks gained last week with strong earnings from the so-called “Magnificent Seven” and a U.S. jobs report that topped expectations. The Fed kept rates steady and appeared unlikely to cut its policy rate in March. This week, China is expected to report deflation.
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