January 27, 2023
MFS Week in Review
A review of the week's top global economic and capital markets news.
PMIs point to economic slowdown around the globe
For the week ending January 27, 2023
As of noon on Friday, global equities rose from a week ago as the U.S. economy grew at a faster pace than expected. Compared with last Friday, the yield on the U.S. 10-year Treasury note was slightly higher at 3.52%, while the price of a barrel of West Texas Intermediate crude oil fell slightly to 80.1. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 18.1 from last Friday’s 19.8.
MACRO NEWS
Flash PMI figures signal contracting business activity across most regions
U.S. composite purchasing managers index (PMI), a measure that tracks both manufacturing and services activity, came in at 46.6 in January, better than the prior month but still among the lowest levels seen since the early days of the pandemic. Typically, a PMI reading below 50 signals a contraction in business activity. While labor demand remains strong, signs of slowing job growth and uncertainty around trading conditions are emerging. In contrast, the eurozone’s composite PMI came in at 50.2, primarily driven by an increase in activity in the services sector, indicating a slight expansion in business activity amid declining energy prices and easing concerns over a deep recession. Japan also saw an expansion in services activity, while the United Kingdom, Germany and Australia are showing signs of slowing business activity, reporting PMI levels below 50 for both manufacturing and services.
U.S. economy grew at a healthy rate in Q4 2022 despite signs of economic slowdown
The U.S. economy grew at an annual rate of 2.9% in the fourth quarter of 2022, slightly down from 3.2% in Q3; at this time last year, economic growth was 1%, compared with 5.7% in 2021. However, that growth was fueled by massive fiscal stimulus and a surge in economic re-openings, while 2022 reflects a more normal pace of growth, consistent with history. While economic output was solid and above expectations, the economy itself may be showing signs of cooling. The U.S. Conference Board Leading Economic Indicator index, a forward-looking measure of economic activity, fell 1% in December from the prior month and fell 7.4% year over year, worse than expected amid a weakening outlook for manufacturing, home builds and financial markets. Generally, when changes in LEI turn negative, it signals a downturn in economic conditions in the near term.
Bank of Canada to pause rate hikes
On Wednesday, the Bank of Canada raised interest rates by 25 basis points to an upper target of 4.5% and stated that it will likely stop raising rates after this meeting, one of the first among developed markets to declare a pause in rate hikes. If the economic outlook evolves as anticipated, with declining inflation and slowing economic growth, the central bank expects to hold rates steady to assess the overall impact of the cumulative increases on the economy. Later this month, the U.S. Federal Reserve will likely slow rate hikes to the traditional 0.25% and may start to debate the criteria — what they would need to see in the labor market and inflation — for pausing rates later this year. Meanwhile, the ECB maintains its stance of continuing aggressive rate hikes, likely through the spring and summer, with a 50 basis point increase anticipated at the next policy meeting, and the Bank of Japan continues its ultra-loose monetary policy.
U.S. has until mid-2023 before it will default on its debt
As policy makers continue to deliberate over raising the debt ceiling, the Treasury Department decided to stop fully funding the Government Securities Investment Fund of the Thrift Savings Plan — a fund that allows government employees to invest in interest-bearing U.S. securities as part of their retirement savings — the latest of several extraordinary measures to avoid breaching the debt limit. According to Treasury Secretary Janet Yellen, the United States has until June of this year before it defaults on its debt. Congress has either raised the debt ceiling or revised the definition of the debt limit 78 times since 1960, so this is a re-occurring issue that tends to emerge every couple of years or so. While negotiations may drag on for some time, Congress stresses that the U.S. will not default.
QUICK HITS
- Fed Vice Chair Lael Brainard is being considered as the top contender for the head of the National Economic Council position to guide President Biden in key economic policy items, including debt limit negotiations, the antitrust agenda and U.S. energy policy. Brian Deese, the current director of the National Economic Council, is planning to step down, though a definitive date has not been announced. Biden is expected to make a final decision in the next several weeks.
- Following the World Bank and IMF, the United Nations also predicts a slowdown in the global economy, expecting a growth rate of 1.9% in 2023 — one of the lowest growth rates in recent decades. However, the economy is expected to moderately pick up in 2024.
- South Korea’s economic growth contracted 0.4% in Q4 2022 due to lower exports and weaker consumer spending, but still expanded 1.4% year over year.
- The eurozone’s consumer confidence rose from -22.2 in December to -20.9 in January, in line with expectations and the highest level since February 2022.
- Amid rising concerns over a recession and elevated inflationary pressures, UK business confidence declined to -23.4 in December, lower than the prior month and the lowest level since 2009.
- Inflation in Australia shot to 7.8% year over year in Q4 2022, more than expected and the highest pace since 1990, increasing the likelihood that the Reserve Bank of Australia will continue to hike rates. Meanwhile, in New Zealand inflation rose 7.2% from the prior year, lower than the central bank’s forecast, paving the way for the possibility of less aggressive interest rate increases.
- The Fed’s preferred measure of inflation, the core personal consumption expenditures price index, is moving in the right direction, declining to 4.4% in December from November’s 4.7%, the slowest pace since October 2021.
- The U.S. is in talks with the European Union to consider a deal related to key materials used in electrical vehicles and batteries that would allow the EU to tap into certain benefits within U.S. markets, particularly the automobile industry. The deal would be a part of the U.S. Inflation Reduction Act, which offers certain exceptions for countries that have free-trade agreements with the United States to engage in U.S. markets, something the EU currently does not have.
- U.S. new orders of manufactured durable goods surged 5.6% in December, beating expectations of a 2.5% increase. The rebound was driven primarily by transportation equipment, with durable goods excluding transportation contracting 0.1%.
- U.S. new home sales rose at an annual rate of 2.3% in December, according to the Commerce Department, and Redfin reported that pending sales increased 2.9% in December from the prior month, the first monthly increase since late 2021. With signs of mortgage rates declining, housing demand may start to pick up in the coming months.
- Household spending in the U.S. weakened in December, falling 0.2% month over month, as other signs of an economic slowdown surfaced. Meanwhile, personal spending rose to 3.4% from the month prior.
- Amid the weakening of the Iraq dinar against the dollar that caused a rise in cost of living for Iraqis, Iraq Prime Minister Mohammed al-Sudani decided to replace the current central bank governor, reinstating Muhsen al-Allaq — who served in the role from 2014 to 2020 — as the new governor.
- Several tech companies joined the wave of layoffs this week, including Google, Microsoft, Spotify, IBM and SAP, as they register weaker earnings in the last quarter of 2022. However, weekly jobless claims fell by 6000 to 186,000, suggesting that the labor market remains tight
EARNINGS NEWS
With about 28% of the constituents of the S&P 500 Index having reported for Q4 2022, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings declined 5.1% while sales rose about 4% compared with the same quarter a year ago, according to data from FactSet Research. If earnings finish the quarter in the red, it would be the first decline since the third quarter of 2020.
Past performance is no guarantee of future results.
Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
