Week ending 3rd March 2023.

As you can see from the accompanying table, markets ended this week on a high note, driven by speculation that the Federal Reserve won’t raise interest rates beyond what markets have already priced in and positive PMI data from China.

China’s Caixin manufacturing and services PMI both came in higher than markets forecast this week, indicating a strong reversion in growth for both sectors. Above the 50-point mark that separates expansion and contraction in activity, General manufacturing PMI increased to 51.6 in February 2023 from 49.2 in January, above market consensus of 50.2. General services PMI jumped to 55.0 in February, up from 52.9 in the previous month, demonstrating the fastest pace of expansion in activity since August 2022. The survey-based indicator said that new business rose the most since April 2021, and new export growth hit a near four-year high as the relaxation of Covid-19 restrictions boosted consumer optimism and demand. There was more positive news from Asia with Japan’s services PMI sector grew at its fastest rate since June 2022, coming in at 54 in February, higher than January’s 52.

After economic data releases pointed to a resilient US economy inducing fear that interest rates will remain higher for longer, investor sentiment received a boost on Thursday (2nd March 2023). This was after Atlanta Fed’s Raphael Bostic’s dovish comments suggested that the central bank could look to pause its rate hikes in the summer and keep future hikes to 25 basis points, whilst other Fed officials have said they will remain data dependent.

In the US, ISM manufacturing PMI continued to show contraction in February with a reading of 47.7 (below 50). On the other hand, ISM services PMI came in above expectations at 55.1 indicating activity continues to grow at a reasonable pace. The US economy and labour market has continued to demonstrate its resilience and investors will also be watching US unemployment and non-farm payrolls closely next week, to gauge whether the market can withstand higher interest rates.

Looking at Europe, preliminary CPI in the region edged lower to 8.5% on year in February 2023, the lowest since last May, but came in above market expectations of 8.2%. Inflation accelerated in the Eurozone’s biggest economies such as Germany, France, Spain, and the Netherlands.

The latest inflation readings, provide the European Central Bank (ECB) with evidence that inflationary pressures remain high and caused investors to expect the bank will continue along its hawkish path to higher rates. The ECB’s Christine Lagarde has said that getting inflation closer to its 2% target is going to take time and that the previously suggested 50 basis point hike in March is still likely.

This coming week markets will be watching China’s National People’s Congress, with the annual gathering commencing on Sunday (4th March 2023), this will be the first meeting since China dropped its strict lockdown policy. Delegates are set to review government reports, layout plans to revive economic growth and decide on its leaders for the next five years.

Data wise, next week we have Eurozone and UK retail sales, Chinese CPI and export data, Canada’s interest rate decision, Japan’s interest rate decision and UK GDP. From the US we are expecting factory orders, non-farm payrolls and US unemployment rates.

Kate Mimnagh, Portfolio Economist