February brought market recalibration due to strong US employment data and persistent pricing pressure, with global equity and bond markets declining.
Robust labour market data from the United States (US), resilient economic prints and inflation figures showing persistent pricing pressure prompted a recalibration in markets in the second month of the year. Greater uncertainty on the glidepath for inflation and consequently interest rate changes from policymakers saw bond yields rise as equity markets trended lower. With February marking a year since Russia invaded Ukraine, Russia announced that it would cut oil production by 500 000 barrels a day from March in response to price caps imposed by Western countries, while tensions between China and the US regarding alleged surveillance re-emphasised that geopolitics remains prominent as an ongoing risk. This backdrop saw the US dollar trade strengthen by 2,7% on a trade-weighted basis.
Major central banks, including the US Federal Reserve (US Fed), Bank of England (BoE) and European Central Bank (ECB) hiked interest rates by 25 bps (US Fed) and 50 bps respectively. Forward guidance from the ECB was more hawkish than its peers, but comments from the US Fed and BoE both still indicated that inflation concerns have not yet been addressed. While markets look forward, the benign interest rate view that drove markets in January appears premature given the data that emerged over the month.
US employment data confirmed robust and broad-based job growth, with unemployment recorded at 3,4% – the lowest figure since 1969. Inflation figures in several regions exceeded expectations, confirming that prices outside of those of food and energy are still increasing, especially for services. Data for the US personal consumption expenditure (PCE) price index for January surprised to the upside, with the annual rate for core PCE (the Fed’s preferred measure of inflation) increasing to 4,7% from 4,6%.
Global equity and bond markets gave back much of the gains from the previous month as enthusiasm and risk appetite petered out in the face of ongoing headwinds. The US earnings season delivered mixed results, but still showed an overall decline in earnings for the last quarter of 2022. Increased input cost and inflation featured prominently alongside negative or cautious forward guidance. The S&P 500 declined by 2,4% over the month.
Mild winter conditions and high levels of gas storage saw European natural gas prices continue its decline by a further 17,0% over the month. This drop has brought future prices for natural gas for the region below €50 per megawatt-hour for the first time in 17 months – down approximately 36% year to date. Resilient activity data and lower energy costs supported improved consumer and business sentiment in the region, spurring European bourses higher over the month and to outperform other developed markets.
Local Chinese markets declined as investors moderated their expectations for an economic recovery post the lifting of Covid-19 restrictions, while profit-making and geopolitical tensions with the US did not help. The Hang Seng lost 9,5% over the month, setting the tone for the 6,5% decline in the MSCI Emerging Markets Index.
Bond markets are now pricing a higher terminal rate of 5,5% for the US and reflecting the possibility that interest rates may stay higher for longer. The US two-year bond yield soared to 4,8%, while the 10-year bond yield reached 4,0%. The Bloomberg Global Aggregate Bond Index reversed January gains, declining by 3,3% over the month.
Europe reinforced its commitment to the energy transition, announcing the Green Deal Industrial Plan, which will focus on scaling up the manufacturing capacity for green technologies and products. The region also agreed a ban on the sale of combustion engine cars by 2035, although this may be contested. Globally, industrial policy, including subsidies supporting the energy transition, has become increasingly competitive as countries and economic regions seek to benefit from growth in this area. While this is good for costs and progress, a concentration in supply chains seems likely and with it come geopolitical considerations.
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