Weekly Outlook

Weekly Outlook 03 January 2023 – 08 January 2023

By January 3, 2023 No Comments

Weekly Commentary: 03 January 2023 – 08 January 2023

Markets were largely range-bound over the holiday-shortened trading week as recessionary fears and surging Covid-19 infection cases within China post-reopening exerted a dampening effect on market sentiments. Initial jobless claims data announced within the week came in at 225K, representing an increase of 9K from the week earlier. Continuing claims data was also higher at 1.71m, compared to the 1.67m just the week prior. Earlier in the month, the U.S. Commerce Department revised up its 3Q22 GDP growth to 3.2% from the previously reported 2.9% whereas the most current weekly jobless claims data are still indicative of a robust U.S. economy and tight labor market. The Fed’s preferred inflation gauge – the Personal Consumption Expenditure (PCE) index, has both of 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%. Globally, the International Monetary Fund projected slowing global growth momentum with economic expansion expected to come in at 2.7% for 2023, weakening from the 3.2% for 2022.

In light of this, stock returns were slightly lower over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (-0.17%), S&P 500 Index (-0.12%) marginally outperforming the NASDAQ Composite Index (-0.28%). Other key market indices that generated positives returns consist of the MSCI AC ASEAN (+1.38%) and Hang Seng Index (+0.96%). Most of the eleven S&P 500 sectors saw returns in the negative territory, with the exception of Financials (+0.72%) and Energy (+0.60%). Main underperformers for the week were from subsectors such as Materials (-1.08%), Consumer Staples (-0.83%) and Utilities (-0.59%). For 2022 as a whole, index returns were negative for the Dow Jones Industrial Average (-8.78%), S&P 500 (-19.44%) and the NASDAQ Composite (-33.10%).

The yield-curve remains inverted as the 10Y-2Y US Treasury spread fell further by 2 bps to -0.55%, driven by U.S 2-year and 10-year Treasury yields climbing by 5 bps to 4.43% and 3bps to 3.87% respectively. Market sentiment also became more risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened by 22bps to 3.39% while the CBOE Volatility Index (VIX) has inched higher by 2bps to 21.67%.

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 the US from 1.2% to 0.5%, while reiterating their 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 has 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. With all of the S&P 500 companies having reported their results for 3Q22, around 71% and 70% of the companies have since reported positive revenue and earnings surprise respectively.

Most of the global REIT markets delivered positive weekly returns with the yield spreads remaining positive. Closer to home, the iEdge S-REIT Index (+1.09%) and its subsectors mostly generated positive weekly returns with Hospitality (+2.57%), Healthcare (+1.53%) and Industrial (+1.34%) leading performances. On the other hand, Diversified (-0.58%) was the sole subsectors that recorded a decline during the period. REITs generally have been affected by decreasing yield spread as interest rates surged and investors price in the possibility of reduced distributions stemming from higher financing costs. However, we do expect inflows to return to the sector given the existing attractive valuations on offer and resilience offered by the REIT asset class in light of the waning global growth outlook.

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