Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of February.
The global economy continues to experience an economic slowdown in response to the pressures spurred by the disruptions from Russia’s invasion of Ukraine, high inflation, and increasingly restrictive monetary policy from the United States and the Eurozone’s central banks. Inflation in many developed nations and growth concerns have kept investors on edge. The most recent domestic Consumer Price Index (CPI) report, detailing January’s inflation, illustrated year-over-year inflation at 6.4%, well above the U.S. Federal Reserve’s 2.00% mandate and 20 basis points higher than market expectations. The Eurozone has similar inflationary pressures, with headline year-over-year inflation at 8.6% in January.
The COVID-19 pandemic has rolled over in the United States and until recently China’s “Zero COVID” had severely constrained their economic activity. Following historic protests in 2022, most of China’s restrictive policies have been lifted which sets the stage for a potential economic rebound in first half of 2023 due to the unleashing of pent-up demand.
Geopolitical turmoil, lingering COVID-19 economic restrictions, supply chain bottlenecks, restrictive central bank policy actions, and inflation measures are topics that the Investment Management Group is monitoring.
The Federal Open Market Committee (FOMC) met in early February and increased rates by 25 basis points, leaving the Fed Funds target to a range of 4.50%-4.75%. Fed Chair Jerome Powell reiterated his aim for policies that are “… sufficiently restrictive to return inflation to 2 percent overtime” and that he “… will stay the course until the Job is Done.”
The European Central Bank (ECB) also met in early February and increased rates by 50 basis points. In their subsequent press release it was noted that their aim is to have policies “that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target.”
Global equities fell in February. Domestically, the drop was driven by poor inflation reports. Specifically, consumer prices came in higher than expectations and producer input costs came in higher than expectations. As a result of these poor reports, during the month of February market expectations shifted towards additional hikes in 2023 and a much lower probability of rate cuts toward the end of the year.
Domestically, Q4 2022 earnings season is winding down with over 95% of the S&P 500 reporting their financial results. Although headline results were strong, with 68% of companies beating earnings estimates, more companies are lowering guidance for future earnings than raising guidance.
Looking at labor markets, tight labor conditions remain firmly entrenched with the unemployment rate at 3.4% and the gap between job openings vs job seekers remains at historic levels.
Looking at performance, the S&P 500 Index fell 2.5% in February. The blue-chip Dow Jones Industrial Average fell by 3.9%. The tech heavy NASDAQ Composite fell by 1.0%. International stocks were also lower with the MSCI All Country World Index of developing and developed market stocks down 2.8% in February. The MSCI Emerging Market Index fell by 6.5% in February. The MSCI EAFE Index of developed international equities was down 2.1% in February.
On December 14th Specifically, investors digested worsening projections despite positive Q3 & Q4 2022 GDP figures of 2.6% and 3.5%. Specifically, investors digested worsening projections despite positive Q3 & Q4 2022 GDP figures of 2.6% and 3.5%.
During 2023, the US Treasury Yield Curve has had shorter maturities rising considerably more than longer maturities. In February, the Treasury Curve had all term points moving higher but with shorter- and medium-term maturities moving higher more than longer maturities. This movement of the curve expanded the current 2/10 inversion by 20 basis points. Specifically, the 10-year U.S. Treasury yield ended the month at 3.92% with the 2-year U.S. Treasury yield at 4.82% netting the current 2/10 inversion to 90 basis points, continuing to signal an economic slowdown.
Mortgage Rates moved higher in February as the Freddie Mac 30-year Primary Mortgage Market Survey rose 35 basis points from January 19th to February 23rd up to 6.50%
On February 16th the Congressional Budget Office released its semiannual forecast detailing projections of at least a $1.4 trillion deficit expected this fiscal year, up from $1 trillion expected in May of 2022. The increase in the projected deficit was due to greater expected net interest payments. This expected deficit will likely lead to the need to increase the current Debt Ceiling to ensure the government does not default on its debt. For context, the Debt Ceiling was first instituted in 1917 and since 2001 the limit has been increased 20 times.
As the 1-year anniversary of the invasion of Ukraine came on February 24th President Biden visited with Ukrainian President Zelenskyy this past month to “… reaffirm our unwavering and unflagging commitment to Ukraine’s democracy, sovereignty, and territorial integrity.” Senate minority leader Mitch McConnell made a similar statement on Fox News saying, “Defeating the Russians in Ukraine is the single most important event going on in the world right now.”
The January CPI report detailed year-over-year inflation at 6.4% well above target levels but below last month’s 6.5%. Fed Chair Jerome Powell has repeatedly told investors that his aim is for policies that are “… sufficiently restrictive to return inflation to 2 percent overtime” and that he “… will stay the course until the Job is Done.” With similar continued hawkish sentiment from the ECB, prospective changes in central bank policies continue to be a headwind to investors.
Despite these economic headwinds, the U.S. economy remains cushioned by the strong labor market, and solid consumer and business balance sheets. Further evidence of economic resilience came with the Q4 GPD report detailing economic expansion at an annualized rate of 2.9%.
Finally, the war in Ukraine continues to weigh on investors due to the impacts from energy and supply disruptions. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a much slower than initially expected pace.