Weekly Commentary: 26 December 2022 – 1 January 2023
Fears of future rate hikes were mounting last week after investors digested the newly released economic data where the U.S. Commerce Department has revised its 3Q22 GDP growth to 3.2% from the previously reported 2.9% while having weekly jobless claims that were lower than expected, pointing to a still robust U.S. economy and tight labor market. The Fed’s preferred inflation gauge – the Personal Consumption Expenditure (PCE) index, has both its headline and core rate slowed by 0.6 pp to 5.5% YoY and by 0.3 pp to 4.7% YoY respectively in November, but the figures are still far from the Fed’s target of 2%. As a result, stocks reported mixed returns where value as loosely represented by the Dow Jones Industrial Average (+0.86%) outperformed, leading in front of the S&P 500 Index (-0.17%) and the NASDAQ Composite Index (-1.93%). Other key market indices managed to stay positive, including the STI (+0.52%) and Hang Seng Index (+0.73%). Most of the eleven S&P 500 sectors were also positive with the exception of the growth sectors such as Consumer Discretionary (-3.10%), InfoTech (-2.02%), and Communication Services (-0.39%). Meanwhile, the top three performing sectors were Energy (+4.44%), Utilities (+1.45%), and Financials (+1.40%).
The yield-curve was still in an inversion, but the 10Y-2Y US Treasury spread has eased by 7 bps to -0.60%, driven by U.S 2-year and 10-year Treasury yields climbing by 15 bps to 4.33% and 22bps to 3.73% respectively. Market sentiment has also turned more risk-on as the U.S. High Yield (HY) – Investment Grade (IG) credit spread contracted slightly by 7 bps to 3.18% although the CBOE Volatility Index (VIX) has cooled further by 145 bps to 20.87%.
The conclusion of the December FOMC meeting saw the Federal Reserve raise Federal Fund rates by 50bps to 4.00-4.25%, in the process, dashing hopes of market participants leaning towards a policy pivot by revising up the terminal policy rate guidance from the 4.6% in September 2022 to the current 5.1% and warning that the restrictive policy rate will be sustained at elevated levels well into 2024. The FOMC also revised lower its forecast for 2022 economic growth in the US from 1.2% to 0.5%, while reiterating its intent to ease policy tightness only after there is adequate evidence of inflationary pressures being well and truly brought under control. In November, the U.S. core CPI decelerated by 0.2 pp MoM to 6.0% YoY while headline CPI also slowed down to 0.1 pp MoM to 7.1% YoY. In Singapore, both the CPI and MAS core inflation have slowed by 0.8 pp and 0.2 pp MoM to 6.7% and 5.10% YoY respectively for the same month. Furthermore, 3Q22 earnings updates have mostly been positive and have lifted market sentiment in the past few weeks. Almost all of the S&P 500 companies have reported their results for 3Q22 where around 71% and 70% of the companies have reported positive revenue and earnings surprise respectively.
As can be seen below, the global REIT markets have delivered mixed weekly returns but the yield spreads still remained positive overall. Back at home, the iEdge S-REIT Index (-0.17%) and its subsectors have reported negative weekly returns with Specialized/pureplay DCs (-5.59%), Office (-3.70%) and Hospitality (-2.52%) being the worst hit subsectors. On the other hand, Diversified (-0.07%) and Retail (-1.01%) were the subsectors that fared better. Overall, REITs have been affected by decreasing yield spread as interest rates surged and investors are pricing in the possibility of reduced distributions from the increased financing costs. However, we expect inflows to return to the sector once market sentiment recovers underscored by the attractive valuation and yields.
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