Weekly Commentary: 23 January 2023 – 29 January 2023
Global equities were generally positive over the past week as recent narrative by Federal Reserve committee members reinforced expectations amongst market participants that policymakers will undertake a more deliberate approach towards monetary policy moves going forward, with a 25bps being consensus expectation for the upcoming FOMC meeting in end-January 2023. The US headline PPI fell 0.5% from the prior month coming in below market expectations, whereas the core PPI rose 0.1% in line with estimates. On an annualized basis, the headline PPI index was up 6.2% and the core PPI increased 5.5% marking a deceleration from the month prior. Softening price pressure ought to ease pressure on the Federal Reserve to sustain its aggressive rate hike outlook thereby giving investors renewed hope that the US economy could achieve the soft-landing scenario that would be conducive for risk sentiments, although policymakers have also re-emphasised that current inflation levels still remain well above the central bank’s target of 2%. China’s reopening was another cause for market optimism as evidenced by Brent Crude prices rising 2.3% within the week to US$86.4. The Bank of Japan also elected to leave unchanged the 0.5% cap on its 10-year yield bond despite current bond yields hovering near the 0.5% ceiling and even breaching it on a number of occasions within previous trading sessions. The Japanese Yen have since depreciated 1.4% against the US Dollar over the week in response to this policy action. In the face of a build-up in domestic inflation, investors are increasingly expecting the Japanese government to pare down the substantial stimulus programme it had been running to date.
Stock returns were higher over the week, with the Dow Jones Industrial Average (-0.48%) underperforming the S&P 500 Index (+0.67%) and the NASDAQ Composite Index (+2.16%). Other key market indices that generated positive returns consist of the MSCI AC ASEAN (+0.95%) and Hang Seng Index (+1.41%). The S&P 500 saw cyclical subsectors outperforming especially within Communication Services (+5.04%), Information Technology (+2.49%), and Consumer Discretionary (+0.83%), whereas laggards typically arise from more defensive subsectors such as Utilities (-2.30%), Consumer Staples (-2.08%) and Healthcare (-0.97%). 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 tightened slightly by 2bps to -0.69%, driven by U.S 2-year and 10-year Treasury yields rising 7bps to 4.15% and 9bps to 3.46% respectively. Market sentiment also became more risk-on with the CBOE Volatility Index (VIX) has declined by 114bps to 19.20%, although we also saw U.S. High Yield (HY) – Investment Grade (IG) credit spread widen further by 5bps to 2.98% reflecting the slowing economic growth outlook.
In the coming week, the US Bureau of Economic Analysis will release December’s Personal Consumption Expenditure which measures the price of goods and services purchased by US consumers, a key data point that the Federal Reserve references in assessing the domestic inflationary landscape. China is also poised to release data on both its manufacturing and non-manufacturing PMI towards the end of the month which should offer some insights into the current economic reopening momentum.
Most of the global REIT markets delivered positive weekly returns with the exception of the FTSE EPRA NAREIT UK REITs Index (-2.24%) and the FTSE EPRA NAREIT Germany REIT Index, although yield spreads remained positive. Closer to home, the iEdge S-REIT Index (+2.47%) and its subsectors generated positive weekly returns with Specialized Pureplay DCs (3.43%), Retail (+2.68%), Hospitality (+2.63%) and Office (+2.43%) outperforming, while defensive subsectors such as Healthcare (+1.30%) and Business Trust (+1.72%) lagged cyclical peers. 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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