The global economy showed resilience at the end of 2022 going into 2023, with better-than-expected economic data and improved risk sentiment boosting financial markets.
Financial markets started the year firing on all cylinders. With markets having priced for a particularly dim outlook, every data point indicating a better outcome prompted improved risk appetite. US price gauges for December continued to ease, supporting market sentiment and consensus for a 25 bps interest rate hike from the US Federal Reserve (Fed) in early February. A moderation in core inflation, which excludes food and energy costs, and a decline in near-term inflation expectations was recorded. Data for the personal consumption expenditure (PCE) price index for December also slowed, with the annual rate for core PCE (the Fed’s preferred measure of inflation) moderating to 4,4% from 4,7% in November. Inflation data from Europe and the UK showed similar trends, although the figures are still much higher and only starting to moderate. The prospect of smaller interest rate hikes from US policymakers saw the US dollar decline by 1,4% on a trade-weighted basis.
Similarly, while growth is largely expected to slow in the coming year, economic data for the end of 2022 and into 2023 has indicated more resilience in the underlying economies than many had expected. US GDP for the fourth quarter came in better than expected at an annualised rate of 2,9% qoq, bringing real GDP for 2022 to 2,1%. The German economy expanded by 1,9% in 2022, relative to growth of 2,6% the previous year, but proving more resilient than many had expected. Increased storage of gas, a decrease in gas prices and mild winter conditions have so far helped ease the risk of an energy crisis in Europe. Activity indicators for January from the eurozone continued to exceed expectations, with improvements in sentiment and activity recorded. China’s fourth-quarter GDP printed at 2,9% yoy, a figure better than the market was expecting. This brings economic growth for 2022 to 3,0%, the lowest figure in decades outside of the pandemic-related figure in 2020 (2,2%). With the lifting pandemic restrictions, expectations are that pent-up demand and excess savings in the country will lay the foundation for a recovery in 2023.
The oil price showed intermittent gains in January, supported by improved sentiment for global growth, but ultimately declined by about 1,7%. OPEC+ reaffirmed its commitment to current production quotas, leaving supply unchanged in principle. Medium-term supply in the energy sector remains a consideration and therefore still warrants close monitoring.
Global equity and bond markets gained on the improved risk sentiment in January. Declining bond yields provided a boost to interest-rate-sensitive growth stocks, which helped the technology-heavy Nasdaq 100 gain 10,7% relative to the S&P 500’s gain of 6,3%. Local Chinese markets rallied on improved mobility and a more constructive economic outlook, with the Hang Seng gaining 9,9% over the month. The MSCI Emerging Markets Index advanced 7,9%, while local European bourses were buoyed by constructive incoming economic data.
Constructive inflation data, alongside an expectation of less aggressive policy action, drove bond yields lower in January, with the US 10-year bond yield declining to 3,5% by month-end. The Bloomberg Global Aggregate Bond Index advanced by 3,3% over the month.
US labour data for December recorded unemployment at 3,5%, in line with its 53-year low. At the same time, these headline figures hide underlying trends in certain sectors. After a meaningful expansion in staff during the pandemic, a change in the global economic backdrop has prompted several tech companies, including Microsoft, Apple, Amazon and Meta, to announce large-scale retrenchments over the past few months.
These companies are, however, still hiring and investing in strategic areas such as AI. Microsoft confirmed a further multi-year investment in OpenAI, the maker of ChatGPT, rumoured at $10 billion. Whether seeking resilience for the future or new frontiers, investors and the world alike will probably continue exploring the power of ChatGPT.
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