Yields Fall on Signs of Lower Inflation, US Report Expected to Show Slowing Inflation
Last Week Review
Global equities gained another 3.4% last week, led by a 4.2% gain for developed markets outside the U.S., a 4.1% increase in emerging markets and a 3.1% return in the U.S. Treasury yields added to their year-to-date declines with the two-year Treasury yield down 0.02% to 4.23% and the 10-year Treasury yield down 0.05% to 3.50%. Trends of lower inflation helped sentiment last week.
U.S. Inflation Eases
Inflation as represented by the Consumer Price Index eased in December to 6.5% year-over-year from 7.1% in November. Core inflation, which excludes more volatile food and energy prices, fell to 5.7% from 6.0%. The month-over-month changes — arguably more timely indicators of inflation trends than year-over-year — declined 0.1% for inflation but increased 0.3% for core inflation. Services contributed to the month-over-month core inflation while goods prices continued to ease. Financial markets responded favorably to the data.
Investors Expecting Slower Fed Rate Hikes
The positive response to the U.S. inflation report likely means investors think cooling inflation will cause the Federal Reserve to slow down with a 0.25% rate hike pace at its next meeting. Commentary from several Fed officials last week suggested this outcome may come to fruition. Markets, based on fed funds futures, have nearly priced out the chance of a rate hike larger than 0.25% (versus a ~25% chance earlier in the week). Still, core services inflation remains stubborn and tight labor market dynamics (initial jobless claims declined to 205,000 last week) threaten wage growth that could keep services prices and overall inflation too high for the Fed’s comfort. The Fed is unlikely to take its foot completely off the gas soon and any downshift to less restrictive policy may be accompanied by hawkish commentary to ensure financial conditions do not loosen in “unwarranted” fashion.
China Relaxes Regulatory Pressure on Tech Stocks
China announced its regulatory crackdown on domestic tech stocks has mostly concluded. This further supported investor sentiment on China equities, which has brightened of late alongside the region’s economic reopening. Longer term concerns that led to last year’s weakness remain, but for now investors have warmed up to China equities (up around 10% year-to-date).
U.S. Bank Earnings Mostly Solid
Last week, U.S. banks reported earnings that were mostly solid versus expectations. However, light guidance (particularly related to net interest income) and warnings of economic challenges weighed on investor sentiment. Fourth quarter revenues of companies in the S&P 500 Index are expected to rise 4% year-over-year, but earnings are forecasted to decline 4%.
This Week Preview
Central Bank Response to Inflation
On inflation, investors may turn to final euro area Consumer Price Index and U.S. Producer Price Index set for release on Wednesday. On central bank activity, several Fed speakers are expected to offer comments during the week while the European Central Bank (ECB) is set to release the minutes for its most recent meeting. ECB President Christine Lagarde is also scheduled to speak at a panel. Finally, the Bank of Japan is expected to announce policy decisions on Wednesday. The post-meeting press conference may offer details on its outlook for the rest of the year.
China’s Economic Pulse Check
China’s import and export data last week painted a bleak picture with both readings down 7% to 10% year-over-year, albeit a bit better than expectations. This week’s fixed asset investment, industrial production and retail sales are likely to paint a subdued outlook as well. Investors will likely evaluate the degree to which China’s reopening allows markets to look past the near-term economic weakness.
Goldman Sachs, Procter and Gamble to Report Earnings
This week, financial services company Goldman Sachs (GS) and consumer staples company Procter and Gamble (PG) are set to report on Tuesday and Thursday, respectively. Investors are hopeful companies can exceed subdued expectations marked by margin compression and a tough demand backdrop pressuring revenue. While there is limited incentive to provide an overly optimistic outlook, there is some hope for hints of better days ahead when companies deliver guidance.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of January 15, 2023.
See our latest insights and research.
IMPORTANT INFORMATION. For Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information is subject to change based on market or other conditions.
Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. Investment management/advisory fees are described in Northern Trust Investments, Inc. Form ADV Part 2A.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. P-011723–2680139–011724