Weekly Commentary: 30 January 2023 – 5 February 2023
Global equities resumed their winning streak, as investors appeared to welcome some hopeful signals that the economy might skirt a recession in 2023. The week’s inflation data were arguably a little less encouraging, however. S&P reported that its composite gauge of current manufacturing and services sector activity climbed to 46.6, up from 45.0 in December (readings below 50.0 indicate contraction). The Commerce Department also reported on Thursday that the US economy expanded at an annualized rate of 2.9% in the quarter, beating consensus estimates of around 2.6%. Full-year 2022, GDP rose 2.1% easing concerns about the prospects of a protracted recession. The U.S. Federal Reserve’s preferred gauge for tracking inflation showed a further cooling of price increases. The government reported on Friday that its Personal Consumption Expenditure Price Index rose at an annual 5.0% in December, down from 5.5% in November. Excluding food and energy, prices rose at a 4.4% annual rate – the lowest in 14 months. With the peak of the quarterly earnings season at hand, profit margins continue to shrink amid high inflation. Margins for S&P 500 companies are forecast to average 11.4% for the fourth quarter of 2022, according to FactSet. If that figure is maintained by the time all quarterly reports are released, it will mark the sixth quarter in a row of declining profit margins.
Stock returns were higher over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (+1.81%), S&P 500 Index (2.48%), and NASDAQ Composite Index (+4.32%). Other key market indices that generated positive returns consist of the MSCI AC ASEAN (+1.78%) and Hang Seng Index (+2.92%). Only 2 S&P 500 sectors registered losses this week – Utilities (-0.5%) and healthcare (-0.9%). Main outperformers for the week were from subsectors such as Consumer Discretionary (+6.40%), Communication Services (+3.28%), and Information Technology (+4.07%). 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 1bps to -0.70%, driven by U.S 2-year and 10-year Treasury yields rising 4 bps to 4.21% and 4 bps to 3.51% respectively. Market sentiment also became more risk-on as the U.S. High Yield (HY) – Investment Grade (IG) credit spread dropped by 7bps to 2.94% while the CBOE Volatility Index (VIX) has dropped lower by 134bps to 18.51%.
This coming week, The U.S. Federal Reserve is expected to lift its benchmark interest rate again, but it’s widely expected to hike by just a quarter of a percentage point rather than a half point. In 2022, the Fed approved seven increases, including a half-point hike in December, down from its previous three-quarter-point increases. The Bank of England will also announce its latest interest-rate decision as the U.K. combats high inflations. The central bank raised rates by a half-percentage point in December and signaled caution about rising rates much higher. The European Central Bank will also announce its latest monetary-policy decision. The ECB raised interest rates by a half-percentage point in December following four consecutive increases of 0.75 percentage points and announced plans to reduce its multitrillion-dollar bond holdings starting in march.
Most of the global REIT markets delivered positive weekly returns except the Thailand Property Fund & REITS index(-1.44%) and FTSE EPRA Nareit Emerging Malaysia Index(-0.56%) with the yield spreads remaining positive. Closer to home, the iEdge S-REIT Index (4.29%) and its subsectors mostly generated positive weekly returns with Office (+8.50%) the outlier sector that outperforms relative to the rest. Hospitality (-0.03%) was the only subsector that generate negative returns. All of the rest of the subsectors of the index generated positive returns. 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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