Last Week Review

Global equities declined 0.3%, led by a 0.6% loss from U.S. equities while stocks outside the U.S., including in emerging markets, changed little. Still, all regions have gained this year with non-U.S. regions leading on an improving economic outlook from lower energy prices and China’s reopening. Treasury yields continued to decline last week. High yield credit spreads rose 0.17% to 4.26%, still below long-term averages.

U.S. Producer Inflation Lower Than Expected

The Producer Price Index rose 6.2% year-over-year, less than expected, although the core index that excludes more volatile prices showed some resilience. Signs that inflation is decelerating support positive investor sentiment, but we think investors remain concerned about economic deterioration because of rate hikes by central banks. Last week, weaker-than-expected U.S. retail sales and industrial production fed into economic growth worries.

Hawkish in Europe, Dovish in Japan

The eurozone economy is holding up better than initial projections, while lower energy prices are feeding hopes that inflation will decelerate enough for the European Central Bank to relax financial tightening. Minutes from the central bank’s December meeting and comments from President Christine Lagarde countered these hopes and investors increased their peak rate expectations. Meanwhile, the Bank of Japan opted to leave its dovish policy settings unchanged, prompting a rally in Japan government bonds.

China’s Economy Showing Resilience

China’s retail sales declined 1.8% year-over-year, well above expectations of a 9.0% decline. Fixed asset investment grew 5.1% year-over-year, below the prior level of 5.3% but a touch above expectations of 5.0%. China’s economy has shown some resilience relative to depressed expectations and we think investors are continuing to position for an improvement after the government loosened COVID-19 restrictions.

U.S. Earnings Trending Above Low Expectations, but Outlook Disappointing

Fourth-quarter U.S. earnings are trending 3% above expectations and are expected to finish down 5% year-over-year, with 11% of companies in the S&P 500 Index reporting. Sales are projected to rise 4%, roughly in line with expectations. Europe’s earnings are projected to rise 2% with a 4% increase in sales. While profits are outpacing underwhelming expectations, disappointing outlooks provided by companies have weighed down investor sentiment. Aggregate 2023 U.S. earnings expectations have declined about 1% this year.

This Week Preview

Global Economic Growth Updates

We think Flash Purchasing Managers’ Index data scheduled for early this week will help assess global economic growth across developed markets. Services and manufacturing broadly are projected to show contraction, though European services are projected to expand slightly. Fourth quarter U.S. domestic product is scheduled to be released on Thursday. On Friday, the core Personal Consumption Expenditures Index, the Fed’s preferred inflation gauge, is expected to show a 4.4% year-over-year increase in December, down from 4.7% in November.

U.S. Debt Ceiling Talks May Spur Volatility

The U.S. government hit its debt limit last week, forcing the Treasury to implement extraordinary measures to avoid default. It is uncertain exactly how long these special measures can last, but estimates point to a mid-year deadline. Until then, debt ceiling negotiations are likely to continue to gain investors’ attention with the potential for volatility alongside what are expected to be tense talks in Congress.

Microsoft, Intel and Boeing to Report Earnings

Several large-cap technology companies are scheduled to report this week, including Microsoft (MSFT) on Tuesday, and Intel (INTC) and SAP (SAP) on Thursday. A couple of notable industrials sector companies are also set to report results, such as 3M (MMM) on Tuesday and Boeing (BA) on Wednesday. Investors are likely to continue to analyze how much inflation is damaging profit margins.

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^{Source: Bloomberg for data, news developments and schedule of economic releases. Data as of January 22, 2023.}