Monthly Market Summary: February 2023

Investment Insights Team, Investment Strategist Team, Wealth Management

Summary: ‘Higher for longer’ prompts market rout in February  

Capital markets experienced a difficult month, as renewed interest rate risk moved into focus: global equities fell by 2.9% (MSCI ACWI in USD terms) and government bonds declined by 3.5% (USD, unhedged terms). Key themes in February included:

• Global economic activity remains resilient as inflation slowly abates;
• Major central banks continue to raise interest rates with further tightening ahead;
• Kazuo Ueda revealed as the new Bank of Japan Governor.

Geopolitical developments were in focus during February. US-China tensions re-escalated after a suspected Chinese ‘spy balloon’ incurred into US airspace, prompting a pause in diplomatic talks. Elsewhere, Russia pulled out of the New START nuclear treaty, just days before the one-year anniversary of the invasion of Ukraine. Commodity prices moved lower last month: the European natural gas benchmark fell to its lowest level since August 2021; gold fell by over 5% (in USD terms), after the US dollar appreciated in February. A disappointing fourth-quarter US reporting season saw corporate earnings decline by 4.8%.

US: Consumer strength; Inflation fading; Fed hikes by 25bps

US consumer spending was remarkably strong in January: retail sales rose by 3% – rebounding from weakness in December – and ‘real’ personal consumption expenditures grew by over 1%. The ISM Manufacturing PMI also moved up to 47.7 in February. Real-time first-quarter GDP estimates are tracking at a trend-like 2.8% (q/q, annualised). Labour market tightness persisted, with the unemployment rate falling to 3.4%, its lowest reading since 1969, but average hourly earnings growth remained negative in ‘real’ terms. Headline and core CPI rates continued to edge lower to 6.4% (y/y) and 5.6% (respectively), though the Fed’s preferred inflation measure, the PCE deflator, crept (marginally) higher in January. The Fed raised its target rate range by 25bps to 4.5-4.75%, with policymakers signalling further tightening to come.

Europe: Robust activity; ECB & BoE hike by 50bps; Windsor Framework

European economic activity tilted higher: the eurozone and UK Composite PMIs expanded at a faster pace in February (mostly driven by service sector activity). This year’s recession forecasts continued to be revised away: the European Commission raised the EU’s 2023 growth forecast to 0.8%. The UK stagnated in the fourth quarter, in turn narrowly avoiding a year-end recession. Headline inflation rates moved lower again in the eurozone (8.6% y/y) and UK (10.1%) in January, though euro area core inflation edged up to a record high of 5.3%. The ECB raised its deposit rate by 50bps to 2.5% in February, with Lagarde signalling a similar-sized hike at the next meeting. The Bank of England increased its base rate by 50bps to 4% and upgraded its economic projections. The UK also struck a new post-Brexit deal with the EU over trade arrangements with Northern Ireland.

ROW: China PMIs rebound; Turkey earthquake; New BoJ Governor

Despite Chinese equities underperforming in February, economic indicators continued to rebound: the NBS manufacturing PMI rose to 52.6, while the non-manufacturing equivalent increased to 56.3. Multiple major earthquakes hit Turkey, where the mounting human and economic toll have yet to be discerned. Elsewhere, Japan’s headline inflation rate rose to 4.3% (y/y), its highest reading since 1981. Kazuo Ueda, a former member of the BoJ Board, was announced as the next Governor – his tenure should begin in April.

Performance figures (as of 28/02/2023 in local currency)

Source: Bloomberg, Rothschild & Co.

Implied terminal policy rates
2023 peak rate estimates derived from OIS curves (%)

_{Footnote: three-month tenor; USD – SOFR; GBP – SONIA; EUR – ESTR
Figures refer to highest point estimate during 2023
Source: Bloomberg, Rothschild & Co., 01.01.2022 – 28.02.2023}