Week ending 24th February 2023.

As you can see from the accompanying table global equity markets have had a challenging week as strong company earning statements and economic data releases point to a global economy that is more robust than expected – which in turn heightened speculation that central banks will continue to tighten monetary policy.

For example, the UK’s PMI data showed businesses returned to growth in February for the first time since last July with a reading of 53.0 (50 is the line separating expansion and contraction).  Although consensus estimates indicated an improvement from January’s 48.5 reading, it was only to 49.0 – which was still in contraction territory.  Likewise, it was a similar story in the Eurozone (with a reading of 53.0, up from 50.8 in January) and the US (50.2 up from 46.8).

UK consumer confidence also jumped strongly (albeit still close to historic lows) – and resilient households bode well for the UK economy as consumer spending accounts for around 60% of the UK’s GDP.

Although these readings are very welcome as it significantly reduces the short-term chances of a recession, it is likely to result in central bank policymakers continuing to increase interest rates and/or keep them high for a long time.

Compounding this speculation was the release of the minutes from the last Fed monetary policy meeting on Wednesday evening (22 February 2023).

Although the minutes largely confirmed what we already knew, in that there was agreement that inflationary pressures were easing, on the whole the minutes were slightly more hawkish than expected as not only did a number of policymakers want a larger interest rate increase at the meeting, but most policymakers appear to think interest rates need to be increased further in the coming meetings – and it should be noted that the meeting was before the recent strong economic data, which one would speculate will only add to their conviction that higher interest rates are needed.

Accordingly, financial markets moved to price-in that US interest rates could potentially increase by nearly another 1% by the summer.

Looking ahead to this coming week we have US durable goods orders; US ISM; Eurozone CPI inflation; Chinese PMI; Japanese industrial production; and Japanese retail sales.

Investment Management Team