Weekly Commentary: 06 February 2023 – 12 February 2023
Upside surprises in economic data and fourth-quarter earnings reports, optimistic tone from Jerome Powell helped most of the major indexes extending their winning streaks into February. Last Friday, the Federal Open Market Committee (FOMC) raised the short-term federal funds rate by 25 basis points, or 0.25% to a target range of 4.50% to 4.75%. A short recap, at the Fed’s last meeting in December, it raised rates by 50 basis points and prior to the December meeting, the FOMC raised short-term rates by 75 basis points for four consecutive meetings. Europe’s major central banks also raised their key interest rates by 0.5% but diverged from the Federal Reserve and each other on their likely next moves. The key rate is now at 2.5%, its fifth large increase in a row, and the ECB has signal it would most likely increase another half-point in March.
The International Monetary Fund raised its forecast for 2023 global economic growth last week, indicating that China’s recent opening had paved the way for a faster-than-expected recovery, and citing resilient demand in the U.S and Europe and lastly, an easing of the energy crisis. China’s economy is now expected to expand 5.2% in 2023 against the previous forecast of 4.4%.
Stock returns were mixed over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (-0.15%), S&P 500 Index (1.64%), NASDAQ Composite Index (+3.33%). Other key market indices that generated positives returns consist of MSCI World (+1.27%) only. 2 S&P 500 sectors registered losses this week – Energy (-5.90%) and Healthcare (-0.10%). Main outperformers for the week were from subsectors such as Communication Services (+5.28%) and Information Technology (+3.76%). 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 9bps to -0.78%, driven by U.S 2-year and 10-year Treasury yields rising 14 bps to 4.34% and 5 bps to 3.56% respectively. Market sentiment also became more risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread tightened 24bps to 2.70% while the CBOE Volatility Index (VIX) has dropped lower by 18bps to 18.33%.
This coming week, the Commerce Department reports on U.S. exports and imports of goods and services in December. The U.K’s office for National Statistics will also release 4th quarter gross domestic product. China’s National Bureau of Statistics will also release January figures on consumer inflation.
Most of the global REIT markets delivered positive weekly returns except Tokyo Stock Exchange REIT Index (-1.09%) with the yield spreads remaining positive. Closer to home, the iEdge S-REIT Index (1.74%) and its subsectors mostly generated positive weekly returns with Healthcare (+4.79%) the outlier sector that outperforms relative to the rest. Retail (-0.26%) and Real Estate Operating Companies (-1.65) was the subsectors that generate negative returns. All of the rest of the sub-sectors generated positive weekly 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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