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Market Update
February 20, 2023

A Rather Unexpected Drop

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Week Ending 17th February, 2022

In this week’s update – The US labour market has dropped rather unexpectedly. Inflation remains persistent and further rate hikes are expected this year. In the markets, global equity funds saw outflows as well as money market funds which saw massive outflows. Global bonds saw slightly reduced inflows to last week. Continue reading for the full market update.

This week saw a return to last year’s playbook as rate hike fears, in the US, dominate again. Of note:

  1. There’s no let-up in the US labour market. Just when analysts were expecting the weekly jobless releases to show a rise to 200,000, it actually dropped back to 194,000 (a decline of -1,000). There has been a resumption in the number of jobs wanted to over 11mn – and this is not letting up. The technology job layoffs we have seen so far are a dop in the ocean vs the total job market. Furthermore, these are layoffs comprising highly skilled people – they will get snapped up quickly. Speaking with a highly established Technology Fund manager this week, one should not confuse the layoffs announced by some of the big tech names with a sign of a weakening economy. There are two reasons behind the latter: a correction to the hirings we witnessed during the covid period as economies start to pivot back to services and also to remove excesses / complacency that has come to settle in the technology space. Starting salaries are really rather eye-watering!
  2. Inflation is proving very persistent. US CPI inflation rose more than expected on both counts (headline and core) even though there was a slight drop overall y/y. Core inflation is being stubborn and, despite the counter-balancing of different line items, it is giving the Fed a headache. It confirms the fight against inflation is far from over.
  3. US Producer Price (PPI) inflation also remains strong with gasoline prices jumping 6.2% (accounting for about one-third of input prices). NG, diesel, jet fuel, soft drinks and motor vehicles also displayed increases. One sizeable offset was a -33.5% fall in fresh and dry Vegetable prices. Even core PPI inflation rose 0.6% m/m. Capacity utilisation rose 0.6% to 77.7% and is now just 0.5% below its long-run average.
  4. Meanwhile, US January retail sales rose a punchy 3.0% m/m (Dec: -1.1% m/m), far in excess of the forecast of 1.8%.
  5. To cap it all, both Goldman Sachs and BoA are now expecting three rate hikes this year and for the Fed Funds Rate to peak at 5.25% to 5.5% by mid-year. The US$ is gaining on the back of this. GS then expects the Fed to start cutting rates at the September Fed Open Market Committee meeting!
  6. US equities have been on a tear this year. The Nasdaq is up some 12% YTD. That’s partly due to the strong performance of the economy which has surprised many. However, there are also technical reasons – one of them being short covering. The period 31st Jan to 15th Feb witnessed the second largest short covering in magnitude over any 12-day period this past decade (GS)…and the Nasdaq is tech heavy.

For w/e 15th Feb, global equity funds saw outflows of $1.85bn driven by even more rate hike fears (see above forecasts by GS and BoA) on the back of stubborn inflation, strong retail sales no let up in the jobs data. 2y Treasury yields hit a three-month high of 4.718%. US and Asian funds also saw outflows of $3.5bn and $310mn respectively. Tech, healthcare and consumer discretionary suffered outflows. Global bond funds saw a reduced inflow of $2.62bn with government and short/medium bonds dominating. HY bonds saw a big sell off. MM funds saw a massive $13.3bn of selling. Commodity fund demand was muted as were precious metals.

Source: Bloomberg, CNBC, Reuters, Trading Economics and Goldman Sachs.

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Market Overview.