This week saw the transition from January to February, the shortest month of the year. The month derives its name from the Latin word februa, which means “to cleanse”. Central bankers from the US, UK and Europe all met this week and their dovish messaging has certainly helped cleanse markets this week.
The US Fed met on Wednesday and as anticipated raised interest rates by 0.25%, as they continue to slow the pace of their rate hikes. While Fed Chair Powell attempted to convince markets of their commitment to take interest rates higher, markets dismissed this and have begun to price in an environment where central banks will be easing policy by year end and inflation will quickly fall back to target. This view was enough to send equities significantly higher, led by last year’s laggards. In some ways this is intuitive; the stocks most negatively impacted by higher inflation and higher interest rates, should therefore benefit the most if and when these trends reverse. The tech-heavy NASDAQ index registered its best January since 2001 and has also seen strong rises on Wednesday and Thursday. At a stock level Meta (facebook) has been a stand-out, with its shares rising 23% on Thursday on the back of positive results. It was not all positive for the US mega cap names however, as weak results from Apple and Alphabet (google) on Thursday evening will likely lead to declines when the US market opens today. Apple registered a 5% drop in sales for Q4 2022 compared to Q4 2021, its biggest decline since 2019.
The Bank of England (BoE) and European Central Bank went one better than their US counterpart on Thursday, raising interest rates by 0.5%. UK base rates are now at 4%, while European rates are at 3%. For the UK this was the tenth consecutive time interest rates have been increased, now reaching 14-year highs. The 0.5% rise was driven by concern over private sector wages rising too fast and leading to embedded inflation. There were some positives from the meeting, with the BoE stating that inflation “is likely to have peaked” and a recession would be less severe than previously predicted. The news of a shallower recession was well received, with the UK mid cap index rallying over 3% and significantly outperforming the UK large cap index, which is typically more internationally exposed. UK government bond yields fell significantly, driven by the expectation of inflation falling quickly. The UK 10-year gilt yield fell to 3% on Thursday.
While the technology focused companies posted disappointing Q4 earnings, the energy sector has posted stellar gains, benefitting from the rise in oil and gas prices following Russia’s invasion of Ukraine. Shell posted its highest ever annual profit of $40 billion for 2022. The US energy company Exxon mirrored Shell’s success, with full year profit of $56 billion. These energy companies could face a level of backlash as they appear to have significantly profited from the energy crisis.
As is customary for the first Friday of the month, US Non-Farm Payrolls jobs data was released. The data smashed expectations and showed a staggering 517,000 jobs were added in January, beating expectations of 185,000. The pace of hiring had slowed in each of the past six months, and this was expected to continue in January. This much stronger than expected data is likely to impact the US Fed’s thinking and could mean rates now need to stay higher for longer in order to cool the economy. Following over half a million jobs being added to the economy, we witnessed unemployment fall to a 53 year low of 3.4%. Although the US equity market has yet to open, the futures market indicates much of Thursday’s gain will be given up today. Good news, it appears, is bad news for markets at the moment!
Overall, this has been another strong week for both equity and bond markets, and it is pleasing to see portfolios continue to move higher. As we have highlighted previously, we continue to tread a careful path, resisting being sucked in to deploying more risk into rising markets and mindful that there are still headwinds, while returns on defensive assets offer compelling value relative to recent history.
Andy Triggs, Head of Investments
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.