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30 January 2023 - Back to central bank action.

The FED and the ECB are meeting this week to decide one more interest rate increase. The market has already gathered enough information from the public interviews and the statements of various central bank officials during the last few weeks in order to expect a 50bp increase from the ECB and a 25bp from the FED. In other words, the ECB is expected to remain in a "50bp increase" mode, while the FED will step down again after going for 50bp the previous time, down from the consecutive 75bp increases before. What is more important, however, is the guidance that the two central banks will chose to offer for the following months. Will the FED signal a potential stop, on Wednesday ? Will Mrs. Lagarde continue to be as hawkish as she was in mid-December when she again faces the press on Thursday ? Financial markets should face volatility towards the end of the week, as scenarios might have to be recalibrated, yet again.

But the Bank of Canada became the first to officially announce a (temporary ?) end to its interest rate hike campaign. It raised rates by 50bp, as expected and in the press conference it offered guidance that they will stop for now and wait o assess the situation. The markets would hope that the FED acts in a similar way sooner than later, although this scenario looks probable to materialize in the spring rather than now.

Equity markets moved higher, with the help of Nasdaq which added another 4% for the week. The FOMO is back (Fear of missing out) as investors feel that they will miss a run-away train. European markets posted decent gains also, with 1% gains on average for the main indices. In terms of sectors Technology and Consumer Discretionary continue to lead, with defensives like Healthcare still struggling. Maybe it is the time to become contrarian and start adding to staples and healtchare again.

The theme that Europe will finally do better than the US in terms of economic growth in 2023 gained steam last week, after the publications of various data from both sides of the Atlantic, which we analyze below.

The January Purchasing Managers Index (PMI) showed further improvement in Eurozone, providing more fuel to the evolving scenario that the region will finally escape recession this year. The Eurozone composite index rose back above 50 (at 50.2) from 49.3 the previous month, with manufacturing improving to 48.8 (from 47.8) and services moving higher ther 50 level, at 50.7 from 49.8. We should note however that the absolute numbers remain close to the 50 level, which signals a potential recession and we need several months of further improvement to declare victory.

The German IFO index rose in January to 90.2 - its fourth consecutive rise - and now stands at a similar level to March 2022. On the one hand, this more positive reading adds to the evidence that Germany may have avoided a recession during the winter. Looking into the details of the report, the business expectations have increased, reflecting a continued normalisation of sentiment, which had fallen to almost historically low levels last autumn on fears about an energy crisis, which would have "killed" the region.

In the US, the PMIs rose too, but remain in rather depressed levels. The manufacturing component rose to 46.8 from 46.2, while the services component jumped more, to 46.6 from 44.7 the previous month. We should welcome the improvement but also note that these values are still consistent with a recession in the next months.

The US Leading Economic Indicators index (LEI) fell by another 1% in December, after falling at a similar rate in the previous month. According to the Conference Board, which is the institution that publishes this index, the current level is almost 100% consistent with a recession in the next few months, if history is any guide.

The better-than-expected preliminary reading of the US GDP for the 4th quarter of 2022 is not as good as it seems. It rose by 2.9% on an annualized basis, vs expectations for 2.5%. But looking into the details we conclude that there could be trouble ahead. The biggest contribution to the GDP growth was a large rise in inventories, which might point to weakening demand, while imports were also very weak, again a potential sign of lack of demand. Consumption also fell in November and December, according to the data. The Eurozone GDP numbers are out this week, with expectations calling for 1.4% growth on a yearly basis.

China's net gold imports via Hong Kong in December jumped by about 150% from the previous month to a four-month high, according to the Hong Kong Census and Statistics Department data, which was the first increase in net imports since August and the biggest month-on-month percentage gain since June. The price has moved close to 1950$, which we consider to be a bit on the toppish side for the next period, as the strong physical demand stemming from India's wedding season and the Chinese New Year is going to weaken significantly.

In corporate news, Microsoft lowered its guidance for the next quarter. The software company posted in-line results for the last quarter, on lowered expectations, but said it expects about 5% lower growth in its cloud business for next quarter and margins to move slightly lower.

Apple, Amazon and Google report quarterly results this week, on the same days that we will hear from the central banks and this should set the tone for Technology and the broad market in general for the following weeks.


Chart of the Week :

European and US recession probabilities decouple.

A very interesting chart by UBS Research. The lines show how the probabilities for a recession have moved up and down, during the last 15 years, with the blue line being the US and the red line belonging to the Eurozone. If we focus on today, we see the huge drop in the red line, which shows the big decline in the probability for a recession in the next 12 months in the Eurozone. At the same time the probability that the US economy will fall in a recession remains at 1, which means 100% probability. This decoupling of expectations can explain the various moves in financial markets so far, where the EURUSD has almost returned to 1.10 and european equities have performed better than their US peers.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : UBS Research


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