Executive Summary
Global equities have rallied in response to the cooling US inflation and labor market data
The US headline inflation declined in line with expectations and reached 6.5% y/y in November, the lowest level in more than a year. Meanwhile, the core figure fell to 5.7% y/y from December’s 6.0%. Signs of softening labor market further supported the positive market momentum. While growth rate of hourly wages came in lower than expected, massive layoffs from the blue chip companies, such as Amazon, Meta, and Goldman Sachs are increasing labor supply and, therefore, producing disinflationary pressure. These developments have raised expectations that the Fed may slow the pace of rate hikes further to 25bps. Importantly, however, the Fed pivot remains less likely until late 2023.
European outlook has improved considerably
Recent pessimism around European capital markets seems to be fading away as the region’s economic outlook has improved massively. Two major catalysts underlie the rising optimism: China’s reopening that is expected to boost demand for European goods (China is Europe’s largest importer) and warm weather forecasts that reduce need for energy consumption and, therefore, make the energy crisis avoidable in 2023.
As a result, analysts are modifying their 2023 forecasts for Europe’s economic growth and equity markets performance. Goldman Sachs now expects a 0.6% annual GDP growth (a mild slowdown) in Euro Area instead of a technical recession. Meanwhile, Citi has upgraded Stoxx 600 (a benchmark index for European equities) to overweight and expects the smallest earnings recession since 1970.
