Global Equity Markets, 30 January 2023
Executive Summary: Central Banks in Focus
Stronger-than-expected US GDP data cheer the markets, demonstrating that recession prospects have become a major worry for investors. In 4Q22, the US GDP grew by 2.9% y/y (vs 2.6% consensus forecast and down from previous quarter’s 3.2%). In addition, the durable goods orders* grew by stunning 5.6% m/m in December (vs 2.5% forecast and up from November’s -1.7%). These strong activity data prints produced a positive sentiment in the market, leading to a 2.5% weekly rally in S&P 500 as well as significant gains in most global equity indices.
An important observation has to be made here. Throughout 2022, positive economic news mostly implied negative price movements in the markets, as they foreshadowed more hawkish Fed in a near future. In contrast, in 2023, markets had positive reaction to the latest macroeconomic releases, which demonstrates that it is recession odds that investors now fear the most. This is another reminder that despite a strong start to the year, downside risks to Western economies remain elevated and could potentially translate into short-to-medium term market losses.
This week is expected to be highly volatile, with major central banks making interest rate decisions and many of the largest US companies reporting earnings. The FOMC meeting will take place on Wednesday, with the US Federal Reserve expected to slow the hiking pace to 25bps, reaching the base rate range of 4.75%-5.0%. Importantly, it is highly possible that the monetary policy decision will be accompanied by a hawkish speech, as to compensate for smaller sized rate hike. The recent stronger-than-expected US GDP data underlies this view. Meanwhile, Bank of England (BoE) and European Central Bank (ECB) will meet on Thursday, both expected to hike by 50 bps, reaching the policy rates of 4.0% and 3.0%, respectively. Lastly, some of the most renowned US companies will be reporting their quarterly results, including Apple, Meta Platforms, Alphabet, Amazon.com, and AMD.