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09 January 2023
- Just like last year, the main driver of market events in 2023 will be central banks, which do not want to give up their fight against high inflation. At the end of last year, it looked like the fight against inflation had been brought under control, but central bankers themselves are warning that nothing is won yet.
- Eurozone inflation may have fallen last week, but we won’t know the US figures until this week and it is too early to confirm the longer-term trend. Central banks cannot be expected to stop raising rates after one or two good numbers.
- Moreover, central bankers themselves are warning that getting too complacent and ending tighter monetary policy might not pay off and could be too costly a mistake in the long run.
Indices
US stocks started the new year with a positive weekly result, mainly driven by Friday’s rally after good labour market numbers. A surprisingly positive gain in the number of jobs was already published by ADP on Thursday and then on Friday the positive NFP data probably gave investors hope that the US economy might experience a “soft landing”.
Stocks in Europe notched up even stronger gains after inflation in the Eurozone slowed and fell below the 10% mark on an annualised basis. Also positive for investors was the fact that the price of natural gas has fallen below pre-Russian invasion levels in Ukraine. The Pan-European STOXX Europe 600 Index ended the week 4.60% higher, Germany’s DAX gained 4.93%, France’s CAC 40 climbed 5.98%, and the UK’s FTSE 100 added 3.32%.
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US30 +1.46% |
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US100 +0.92% |
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US500 +1.45% |
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GER40 +4.93% |
Commodities
Friday’s labour market data may have exceeded market expectations, but relatively low job growth and cooling growth in average hourly earnings mean investors are expecting a slowdown in interest rate growth. This is helping to boost not only equities but also gold, which approached seven-month highs at the end of the week. “Sustainability above the immediate support of $1,850 will add strength for the next leg higher of $1,878, above which $1,896 is a high probability target,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
Energy commodities, on the other hand, have started the new year very poorly. The price of natural gas fell nearly 16%, the worst start to a year in more than 30 years. The price of crude oil, in turn, lost more than 8%, the worst start to a year since 2016.The decline was mainly due to an unusually warm winter and commodity stocks at all-time highs as countries had stocked up sufficiently ahead of the winter, given the ongoing conflict in Ukraine.
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Gold +2.27% |
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Silver -0.56% |
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BRENT -8.56% |
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NATGAS -15.93% |
Forex
The US Dollar lost significantly on Friday after good news from the labour market, but still strengthened slightly during the week. Friday’s data caused investors to reassess their expectations for further interest rate hikes by the Fed, which are expected to rise by 0.25%. But a relatively strong labor market still keeps investors on edge about the Fed remaining more hawkish than the market anticipates.
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EUR/USD -0.54% |
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USD/JPY +0.73% |
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GBP/USD -0.04% |
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USD/CAD -0.79% |
Macro
We had to wait until the end of the week for the most important data. On Thursday, ADP published data showing that the number of new jobs in the private sector rose by 235,000 compared to the expected 150,000.
The data on weekly jobless claims also came as a positive surprise, falling to 204,000 (forecast 225,000), the lowest since September.
Friday’s official payrolls report from the Labor Department showed an increase of 223,000 in December, which is admittedly the smallest gain in two years, but markets were expecting an even lower number (200,000). Unemployment then fell to 3.5%, also a long-term low.
The purchasing managers’ indices for both the manufacturing and service sectors in the US saw another decline. The services sector PMI from ISM even fell below 50 points for the first time in two years and is in contractionary territory.
Eurozone inflation fell back below 10% in December after two months (9.2% y/y growth vs. 9.7% expected), but core inflation rose to an all-time high of 5.2% y/y from 5.0% in November.
What to watch out for this week
- Next week will be relatively poor in important data. The main news will be the December inflation in the US, which is expected to slow from 7.1% to 6.7% y/y. Core inflation is expected to rise 5.6% y/y and 0.2% m/m in December. A more pronounced weakening of inflationary pressures may indicate the possibility that the Fed will begin to taper its hawkish monetary policy.
- In the UK, November GDP will be released. Record inflation and strikes in the transport and public sectors are likely to lead to a long-running recession, which the UK is already technically in after two quarterly economic slumps.
- Germany is also due to release GDP figures, which should show the impact of the war in Ukraine on Europe’s largest economy.
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