Data Overload

Last week was billed as an important one for markets and it lived up to expectations. There were a fair few twists and turns along the way but global equities ended the week up 1% in local currency terms and 3% in sterling terms.

US equities outperformed, helped by a strong performance from tech stocks, while China underperformed as did UK equities – although this didn’t stop the FTSE 100 hitting a new all-time high on Friday. As for bonds, US Treasury yields ended the week slightly higher while UK Gilt yields were down close to 0.3%.

The Federal Reserve kicked off the fun and games on Wednesday with its move to raise rates by 0.25% to 4.50-4.75%. This was a smaller hike than the 0.5% rise in December and was expected. Market attention, however, was very much focused on the forward guidance and here there were mixed messages.

The Fed statement reaffirmed that ongoing increases in rates remain appropriate and it would need substantially more evidence to be confident that inflation is on a sustained downward path. Yet, Chair Powell in his press conference, then took a more dovish line and failed to row back convincingly against the recent rally in markets which has in part been predicated on the hope of Fed easing later this year.

The story then became considerably more complicated on Friday. US employment unexpectedly surged in January, beating all expectations by a wide margin and indicating the labour market remains considerably stronger than had been thought. Business confidence in the service sector also bounced strongly, countering the weakness seen in manufacturing.

Friday’s numbers suggest the US economy is in fact holding up reasonably well and reduce the likelihood that a recession will prompt the Fed to cut rates while underlying inflation pressures remain significantly above target.  We remain sceptical but the market still expects the Fed to be cutting rates by year end, albeit not by as much as before.

Meanwhile as anticipated, the Bank of England increased rates by 0.5% to 4.0%. This was the same size as the hike in December but the rhetoric this time was considerably less hawkish. The Bank suggested it is close to the end of the tightening cycle and it is looking much more certain that rates will peak no higher than 4.25-4.50%.

The BOE is now forecasting a rather shallower recession than before. Even so, it still expects GDP to shrink 0.7% this coming year and longer term is gloomier than ever, now believing trend growth is no more than 1% p.a.

As for inflation, the Bank is projecting it to fall well below its 2% target next year. But it highlighted the uncertainties and is rather sensibly paying more attention to near term developments than its long-term projections, given how wrong the latter have been recently.

The European Central Bank also raised rates by 0.5% to 2.5% and was more hawkish than the BOE or the Fed. It plans another 0.5% rise in March and could well raise rates a bit further subsequently.

The other big focus was the earnings reports of the US tech titans.  Meta (Facebook) beat expectations and rebounded strongly but the results of Apple, Amazon and Alphabet (Google) were all pretty downbeat with revenues falling at Apple for the first time in four years.

Even so, the results were not bad enough to prevent these stocks all ending the week higher and a continuation of this year’s bounce in the tech sector. With tech valuations still looking on the high side, earnings vulnerable to any further weakening in the economy and the recent fall in bond yields looking overdone, we do not believe the sector is out of the woods yet.

Finally, out of the blue came ‘balloongate’ which put paid to the recent thawing in relations between the US and China. Some of the hot air came out of Chinese equities last week but this was really just a correction to the very strong performance in recent months. We remain positive on the Chinese market as a strong rebound in that economy should more than outweigh renewed geopolitical tensions.

This coming week is relatively quiet on the data front, which is just as well as investors are still busy trying to figure out the implications of last week’s data overload.

Rupert Thompson – Chief Economist