Weekly Commentary: 16 January 2023 – 22 January 2023
Global equities and Treasuries were up the past week due to expectations that inflation may be abating and easing pressure on the Federal Reserve to make further sharp interest rate rises. The US CPI fell 0.1% from the prior month and gained 0.3% on a core basis according to the CPI report released by the US for the month of December 2022. On an annualized basis, The CPI index was up 6.5%, and stripping out food and energy, up 5.7% marking a deceleration. Expectations are that the Fed will continue to slow the pace of its interest rate rises with a 0.25% increase at its next policy meeting at the end of January. China’s reopening and lower energy prices have also eased some of the pessimism around the market and encouraging investors back into risky assets. Inflation may be easing at US/Europe but elsewhere, it is rising at a faster-than-expected pace in December. Japan’s 10-year yield bond breached the 0.5% cap set by the Bank of Japan less than a month ago. This could spark a potential turn of events as pressure grows on the central bank to tighten policy, ending the government’s stance on easy monetary policies. Japanese Yen has been a beneficiary as it has risen to more than seven-month high against the dollar and the interest rate disparity may constrict.
In light of this, stock returns were higher over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (+2.01%), S&P 500 Index (2.71%), NASDAQ Composite Index (+4.83%). Other key market indices that generated positive returns consist of the MSCI AC ASEAN (+2.98%) and Hang Seng Index (+3.56%). Most of the eleven S&P 500 sectors saw returns in the positive territory, with the exception of Healthcare (-0.12%) and Consumer Staples (-1.44%). Main outperformers for the week were from subsectors such as Consumer Discretionary (+5.77%), Information Technology (+4.62%), and Real Estate (+4.41%). 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 widened further by 10 bps to -0.73%, driven by U.S 2-year and 10-year Treasury yields dipping 2 bps to 4.23% and 12 bps to 3.62% respectively. Market sentiment also became more risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened by 17bps to 2.83% while the CBOE Volatility Index (VIX) has climbed lower by 233bps to 18.35%.
This coming week, China’s National Bureau of Statistics will release 4th quarter December data on industrial production and fixed-asset investment, a measure of infrastructure and equipment investing. US Commerce Department will also release December retail sales which measure spending at stores, online, and in restaurants. Investors will be closely looking at Japan’s economic data as Japanese yields matters. This is partly because it is very large and has attracted lots of foreign speculators. Japanese who have cash in their bank would be tempted to sell their vast foreign assets to reinvest at home if domestic bonds become more attractive.
Most of the global REIT markets delivered positive weekly returns except the Tokyo Stock Exchange REIT index (-0.50%) with the yield spreads remaining positive. Closer to home, the iEdge S-REIT Index (1.08%) and its subsectors mostly generated positive weekly returns with Hospitality (+2.90%) the outlier sector that outperforms relative to the rest Diversified (0.60%) was the only subsector that generates negative returns. Healthcare (0.16%), Industrial (0.40%), Specialized Pureplay DCs (2.07%), Office (0.76%), and Business Trust (0.87%) were the subsectors that generated positive returns 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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