Weekly view - Central banks back in focus

Real US GDP growth came in at 2.9% annualised in Q4 22, down from Q3 (3.2%) but better than expected. Yet a reversal of the rise in inventories that explains half of that growth will turn up in Q1 GDP numbers. Moreover, consumption and capital spending were weaker than consensus. Meanwhile, December data showing lower consumer spending but steady incomes pushed the US savings rate higher for the third consecutive month. With major central bank policy meetings this week, we expect the Fed to raise rates by 25bps. This would be down from 50bps in December and 75bps in November, reflecting a slowdown in recent inflation readings. Yet the Fed’s continued concern about the tightness of the labour market means we see it continuing to raise rates until May before pausing (but not lowering rates). The market, for now, is concentrating on lower inflation and less aggressive monetary tightening and is paying less attention to, at best, prudent corporate guidance. This indicates a degree of complacency and could leave the S&P500, trading close to a hefty 18 times forward 12-month earnings, without strong fundamental support. Thus, equity volatility, currently quite low, could increase and needs to be traded as an asset class. 

January purchasing manager indexes in Europe showed an uptick in business sentiment. The employment subindex rose at its fastest rate for three months and cost pressures cooled as supply bottlenecks were overcome. Lower gas prices, Chinese reopening and heavy fiscal support are clearly improving the mood among European corporations. Growth was slightly better than expected in Spain in Q4, with government spending and weaker imports compensating for weak household consumption The latest data suggest that the European Central Bank will need to stay on the hawkish side this week, with another 50bps hike in the deposit rate on the cards. Bond markets took note, with the rise in government bond yields cementing our negative stance on euro periphery bonds. On the equities side, with the reporting season just getting underway, investors in European equities will see how the better-than-expected economic environment translates into earnings.  

The headline consumer price index for Tokyo accelerated well above expectations in January (to an annual 4.4%), increasing pressure on the next Bank of Japan governor to ‘normalise’ monetary policy. The announcement of a big wage increase by one high-profile retailer could add to this pressure (although the retailer in question aims to compensate by increasing productivity instead of hiking prices). In the circumstances, we are positive the Japanese yen against the USD.  Fraud allegations against one of India’s biggest conglomerates and continued redemption requests from a prominent US property fund remind us that accidents will happen in 2023.