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The Long and Short of it, week ending 03 February 2023

Posted: 07 February, 2023

Topic: Telecoms , Financials , Basic Materials , Energy , Industrials , Technology

Publication Type: Market Commentaries

Through Thursday, stock markets powered higher, propelled by an as-expected FOMC rate decision, the absence of direct, hawkish comments from Fed Chair Powell following the decision and indications wage inflation – a primary concern for the Fed – was slowing. META’s earnings beat helped as well, with META’s stock price surging 23% Thursday, lifting other tech stocks and, in particular, the Nasdaq Composite Index as well. After-the-close earnings reports Thursday from Alphabet, Apple and Amazon, however, cooled market enthusiasm overnight and then Friday morning’s much stronger-than-expected jobs report renewed concerns of continued Fed vigiliance, sending all 3 major stock market indexes lower on the day. While the indexes all closed lower Friday, the Nasdaq Composite and S&P 500 Indexes still registered gains on the week. 10-year Treasury rates, down almost 11bps through Thursday, reversed course Friday, jumping 12bps and leaving the 10-year Treasury rate 1bp higher on the week (an 11bp rise in 10-year real rates was offset by a 10bp fall in 10-year inflation expectations). The U.S. dollar behaved similarly, moving from slightly weaker through Thursday to stronger by 1% over the week. At week’s end, the S&P 500 Index increased 1.6% to 4,136.48, the Nasdaq Composite Index rose 3.3% to 12,006.96, the Dow Jones Industrial Average decreased 0.2% to 33,925.06, the 10-year U.S. Treasury rate rose 1bp to 3.52% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) strengthened 1.0%.

The STOXX 600 and FTSE 100 Indexes moved lower through Wednesday with uncertainty surrounding upcoming central bank rate decisions dominating markets. A much greater-than-expected Spanish inflation release combined with weak German economic data (declining Q4 GDP and falling retail sales) ignited both concerns of euro zone recession and continued aggressive ECB monetary policy. The IMF reduced its forecast for UK GDP growth also contributing to increased recession concerns. Wednesday’s as-expected FOMC decision accompanied by “not-hawkish” comments from Fed Chair Powell and Thursday’s as-expected BoE rate decision accompanied by dovish statements from BoE officials, moved European stock markets higher Thursday. And while Friday’s much stronger-than-expected U.S. jobs report pressured U.S. markets lower, European markets considered the report a sign of a resilient U.S. economy avoiding a hard landing, pushing both the STOXX 600 and FTSE 100 Indexes higher. Slowing euro zone inflation combined with an increase in euro zone business activity, increased hopes of a soft landing also pushing index levels higher. Gains in the STOXX 600 Index came despite somewhat hawkish comments from the ECB following its as-expected rate decision (Thursday) with investors seemingly accepting the comments as nothing new. The FTSE 100 Index benefited from a significantly weaker British pound (versus the dollar) and strong energy stock performance. For the week, the FTSE 100 Index increased 1.8% to 7,901.8, the STOXX 600 Index increased 1.2% to 460.76, the 10-year Gilt rate fell 27bps to 3.05%, the 10-year Bund rate decreased 4bps to 2.20% and the British pound and euro weakened 2.8% and 0.7%, respectively, both against the U.S. dollar.