MFS Week in Review
A review of the week's top global economic and capital markets news.
A review of the week's top global economic and capital markets news.
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.
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.
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.
Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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