Market Update: February 28, 2023

Photo by reza shayestehpour on Unsplash

Economic data for the holiday-shortened week included U.S. GDP data for Q4 that stayed solidly positive but with a slight downward revision, mixed to improved housing data, decent jobless claims, and stronger consumer sentiment. However, higher PCE inflation was interpreted negatively.

Global equities lost ground last week as higher inflation readings continued to sustain assumptions for tighter central bank policy. Bonds suffered during the week as well, due to the same factors elevating interest rates. Commodities were mixed with crude oil little changed, but natural gas prices seeing some supply-driven recovery.

U.S. stocks fell back slightly last week as both producer and consumer inflation failed to cool as fast as was hoped, coupled with strong retail sales figures. This, of course, was taken to imply a Fed that stays hawkish for longer, with perhaps even another quarter-point hike mid-year now baked into some estimates. In recent weeks, a 5.00% possible terminal rate has now morphed closer to 5.25-5.50%, although the sharp increases seem to still be in the rear-view mirror. By sector, a mix of growth (consumer discretionary and communications) and defensives (staples and utilities) earned positive returns, while energy fell by over -6% on the losing side.

Foreign stocks gained in Europe and the U.K., while Japan and emerging markets fell back on the week. Similar to the U.S. in some respects, sentiment in Europe has continued to strengthen, along with stronger-than-expected corporate earnings results, while inflation in the U.K. slowed. However, the ECB remains steadfastly hawkish, with continued expected rate hikes in coming meetings, as with the U.S. Fed. Speaking of central banks, a change in the Bank of Japan leadership has raised questions about the potential for breaking out of the yield curve control policy, and letting long-term rates rise higher to a more natural level. Chinese equities fell back upon sentiment challenged by less favorable rhetoric concerning U.S.-China relations, related to the recent balloon incidents, although details still remain unclear.

Bonds fell back last week as well, with firmer inflation numbers pushing interest rates higher as a variety of economists decided to raise estimates for the Fed terminal rate by another quarter-percent roughly. In fact, the 1-year T-bill yield breached 5% for the first time in 15 years, as investor expectations for a higher Fed funds rate seeped into markets, but the curve remained solidly inverted. Treasuries outperformed corporates, although high yield and floating rate bank loans outperformed. Foreign bonds were held back by both higher rates and a stronger U.S. dollar.

Commodities declined across the board last week, not helped by strength in the dollar, despite continued expectations for rising demand through the year. Energy led the way downward as crude oil prices fell -4% last week to under $77/barrel, and natural gas declined another -9%, with warmer winter temperatures weighing on heating demand and higher inventories for petroleum generally.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.