Weekly view - New year, new hopes

After a difficult 2022, we would like to wish all our readers a prosperous 2023. Indeed, the first full week of the year saw markets in risk-on mood thanks to data that held out the hope for less-aggressive monetary policy. The December US nonfarm payrolls report showed a surprising drop in annual wage growth to 4.6% from the 5% expected. Weaker wage growth and fewer hours worked is consistent with weak ISM surveys of business activity for December, with services activity contracting for the first time since 2009 (excluding the pandemic). While headline employment numbers in small and mid-size US companies remain resilient, further signs of a weakening economy can be detected in big US corporations’ moves to lay off staff in earnest, especially in tech- and construction-related sectors. And the Baltic Dry Index, also seen as a leading indicator of global economic activity, declined sharply last week. At this point, the main factor sustaining Fed hawkishness is tightness in the labour market, with job openings far outstripping the numbers unemployed. While US data prompted a sizeable drop in US Treasury yields, last week saw the end of negative-yielding bonds globally as Japanese government bond (JGB) yields ticked higher along the curve (we remain negative JGB). Equity markets will take their direction from the 4Q earnings season, which starts this week. With some 20% of S&P 500 companies already providing earnings guidance, the market is braced for only a moderate decline in earnings-per-share growth. We expect risk premiums to converge this year and US equities to underperform the rest of world, as was the case last week. This week, US consumer inflation will be an important indicator of prospects for a Fed pivot. On the political front, Kevin McCarthy’s difficult election as speaker of the US House of Representatives does not bode well for the legislative process. Pro-Bolsonaro riots in Brazil, coming two years after similar scenes in front of the US Congress, show politics will remain an important investment theme this year.

The bigger-than-expected fall in December headline inflation in the euro area (to 9.2%) helped the STOXX Europe 600 to a gain of 4.6% last week (in euros). Much of the inflation decline was attributable to falling energy prices, but core inflation remains high. Similar to the US, we estimate 2023 GDP growth of -0.2% for the euro area, where we still think the European Central Bank could hike rates aggressively in the coming months. In China, president Xi Jinping's New Year speech focused on covid-reopening and boosting growth, with a chance that tough regulations that have hit the property sector hard may be further relaxed. Another sign of Chinese re-opening was the announcement that Ant Group will soon be listed—but at a fraction of the original valuation and without Jack Ma, who has ceded control of the company. While reopening will be bumpy, we believe Chinese GDP growth will accelerate this year and we are positive Asian credit.