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6 March, 2023 - Macroeconomic uncertainty continues to puzzle investors.



Inflation and central banks' intentions continued to dominate the markets' collective mind, while at the same time trying to forecast the impact of the previous aggressive rate hikes on the economies. After a horrible 2022, the investment environment continues to be foggy. Conflicting macro-economic data in the US continue to puzzle investors as a "no-recession" scenario is gaining traction in the equity markets. All indicators, however, point to a recession coming in the next months and it is only the labor market which continues to show strength, which is indeed a very important factor and cannot be ignored. At the same time, the dis-inflation process seems to have lost momentum in the first two months of the year, which coupled with the strong job market and the "no-recession" scenario makes bond investors willing to bet that the FED and other central banks will continue to move rates even higher than already priced in. And this possibility points to further pain both in bond and equity markets, if it materializes.


Equity markets moved higher after touching important support levels. We had highlighted last week that the 3940 level for the S&500 is an important support level, which was tested successfully. The index rebounded strongly from a low of 3930 to finish the week with a 2% gain and sit comfortably again above 4000, with most of this move happening on Friday. Europe also moved higher by 2% on average, after a strong finish to the week. At this stage equity markets are moving primarily based on sentiment and on fears of missing out on a potential rally, after positioning for most investors was light at the start of the year. It is no surprise that defensive sectors and regions like Swiss stocks have severely underperformed since the start of the year. Investors are willing to bet heavily on the scenario that there will be no recession finally in 2023. We continue to be cautious, but optimistic.


Bond markets continued to correct lower, with government yields moving higher, but the move lost momentum on the last day of the week. After the continuous sell-off the last couple of weeks and after yields reached new highs, buyers finally emerged on Friday. The US 10-year touched a high of 4.08% to finish at 3.97%, while the German equivalent fell to 2.67%. We find the current levels of high quality, investment grade bonds attractive again to lock returns for the next 3-5 years of about 4% in EUR and almost 6% in USD.


The Eurozone inflation numbers for February presented a mixed picture. After the negative surprises on a country-level from Germany, France and Spain, the Eurozone composite number was finally announced better than feared. The headline inflation CPI fell to 8.5% on annual basis, down from 8.6% in January. However, the Core CPI which excludes food & energy prices rose to a new cycle of 5.6%, from 5.3% in the previous months. These figures cannot let the ECB relax at all, even if there seems to be a moderation in the headline number from the peak of 10.6% at the end of October.


China's manufacturing PMI rose to the highest level since 2013. The index rose to 52.6 , up from 50.1 in January and as a reminder it was at 47.0 only at the end of December. The Services PMI also rose significantly to 55.6, up from 54 last month. The announcement of the Chinese PMIs with the jump in sentiment and activity in the two months following the relaxation of the Covid19 restrictions is a very positive sign for global growth. At the same time, however, China's comeback is potentially going to be inflationary for specific goods and raw materials, adding to the fear of inflation remaining high in the coming months.


On the contrary, the Chicago Manufacturing PMI collapsed again to 43.6. Of course this is still higher than the 38.0 low which was registered in November and which was just a little higher than the record low of 31.5 of March 2020 , the first month of the pandemic. But the absolute number is deep below 50, the level which signalling economic expansion and is consistent with recession, if history is any guide.


In corporate news, US major retailers painted a rather "grey" picture for 2023. What is becoming clear from the announcements of the revenue and income reports of the major retail shops in the US (Walmart, Costco, Target) is that high prices for goods is finally having a toll on consumer demand, which is slowing down. For 2023 all of them said that conditions continue to remain challenging and revenue growth will further slow down. What is positive for the companies (not for the economy) is that their profit marging seem to be stable or even rising, as cost-cutting efforts is their main mission. Another positive conclusion from their reports is that it seems we are reaching the point where they will not be able to further increase prices for the goods they are selling without hurting significantly more the consumer demand. This has positive implications for the inflation of goods in the next 3-6 months.


 

Chart of the Week : Chinese equities are recovering.



The above chart shows the CSI 300 index, which represents local chinese stocks. After the lows of October, the index is clearly on a recovery phase, which was initially driven by the decision of the government to relax the very strict Covid19 restrictions. Since then, the index has been trending in a nice up-channel shown in green dotted lines. The recent correction seems to have found support on the lower barrier of this channel, from which a big rebound occured last week. Barring a geopolitical even (Taiwan, Russia) Chinese equities are set to rebound further and cover the lost ground of last year.


Disclaimer

• 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 : Factset

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