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The Long and Short of it, week ending 27 January 2023

Posted: 31 January, 2023

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

Publication Type: Market Commentaries

Major stock market indexes ended the week higher with the Nasdaq Composite Index strongly outperforming both the S&P 500 Index and the Dow Jones Industrial Average. Markets moved higher Monday on growing expectations the Fed would tighten by 25bps this week, acting as a prelude to less aggressive Fed monetary policy and perhaps easing later this year. Indexes remained range bound Tuesday and Wednesday but moved higher Thursday following the first estimate Q4 GDP release. Though the headline number was better than expected, the increase was driven by a build in business inventories but offset by increasing-but-slowing consumer spending and business investment. Durable Goods Orders and New Home Sales (also released Thursday), however, came in stronger than expected. Nonetheless, indexes again moved higher on expectations of easing Fed monetary policy. Friday’s PCE price index released showed a YoY increase of 4.4% and 0.1 MoM, less than expected, but the core PCE Price Index registered a 0.3% MoM increase adding to uncertainty regarding future Fed policy. Stock indexes increased Friday, perhaps bolstered by lower-than-expected household spending (part of the personal income and expenditures report) but closed well off intraday highs. The 10-year Treasury rate moved 3bps higher with an 8bps increase in 10-year inflation expectation offset by a 5bp decline in 10-year real rates. (10-year real rates fell to 1.19% while 10- year inflation expectation increased to 2.32%). At week’s end, the S&P 500 Index gained 2.5% to close at 4,070.56, the Nasdaq Composite Index jumped 4.3% to 11,621.71, the Dow Jones Industrial Average increased 1.8% to 33,976.08 the 10-year U.S. Treasury rate rose 3bps to 3.51% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) weakened 0.1%.

European stock markets were mixed last week with the FTSE 100 Index almost unchanged and the STOXX 600 higher by less than 1%. Hawkish comments from ECB officials increased expectations of the ECB raising rates another 50bps at this week’s meeting offsetting expectations of positive effects from China’s reopening. Interestingly, the STOXX 600 and FTSE 100 Indexes reacted oppositely to Tuesday’s Composite PMI releases. The higher-than-expected euro zone release spurred expectations of continued aggressive ECB policy pushing the STOXX 600 Index lower while a greater-than-expected decline in the UK release moved the FTSE 100 Index lower on growing recession concerns and left investors uncertain with regards to this week’s BoE rate decision. Both indexes moved higher Thursday and Friday (the STOXX 600 Index rose more than the FTSE 100 Index), supported by better-than-expected earnings results, expectations of a soft landing due to China’s reopening and as a result of the rally in U.S. stock markets (due to increased hopes of easing Fed monetary policy). For the week, the FTSE 100 Index decreased 0.1% to 7,765.15, the STOXX 600 Index increased 0.7% to 455.16, the 10-year Gilt rate fell 5bps to 3.32%, the 10-year Bund rate increased 7bps to 2.24% and the British pound and euro each strengthened 0.1%, both against the U.S. dollar.