Market comment 2023

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So far — despite the fears and predictions of an economic downturn — labor market data doesn’t suggest the United States is on the brink of a recession. Here’s a guide to a few key numbers economists are watching closely.

4 changes in the economy to watch if you’re worried about a recession - Vox

• Excellent overview of what to look for in the labor market
  

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The economy is at a turning point and the Fed does face some “tough calls,” Reis said. The key going forward is the path of wages. Workers need to have their wages go up because their paychecks have not kept up with inflation. So the Fed is going to have to gauge if the rise in wages is too much, just right or too little, he said. If wages don’t rise much, inflation can quickly return to the Fed’s 2% target, he said. If wages rise in line with productivity, the Fed won’t have to raise too much and inflation will come down to 2% in a few years. This will be difficult because productivity is an economic variable that is hard to measure. If wages spike, this would probably cause companies to continue raising prices, kicking off a wage-price spiral, Reis warned. The Fed might overreact to the rise in wages, he said.

'Markets are going to get rocked' as Fed is likely to push rates higher, economist warns

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Bring out the bubbly. It no longer looks like Europe’s going to enter a recession, according to Goldman Sachs economists. Economists led by Sven Jari Stehn still expect the eurozone economy to contract in the fourth quarter, but now anticipate a slight rise in the first quarter. For 2023 as a whole, the Goldman team expects the euro area economy to rise 0.6%, against a previous forecast of a 0.1% dip. There are three main reasons. One is that the industrial sector has been surprisingly resilient. Another is that natural gas prices have continued to fall sharply. And finally, China is reopening earlier than expected.

Goldman Sachs economists no longer expect a recession in Europe

No matter how miserable 2022 was for investors of all sorts, they could have undone all manners of sin with one simple move — going long Chinese stocks in late October. The KraneShares CSI China Internet ETF KWEB, +0.12% has exactly doubled (okay, rose 99.88%) from its Oct. 24 intraday low. Of course, no one in their right mind would’ve made that investment allocation, so here in the real world, the question really is how far the rally can go. Mark Haefele, chief investment officer at UBS Global Wealth Management, says China’s unexpectedly rapid dismantling of COVID restrictions is paving the way for a faster-than-anticipated economic reopening. UBS has upgraded Chinese equities to “most preferred” in Asia, at the expense of South Korea, and says select companies in the consumer, internet, pharmaceutical, medical equipment, transportation, capital goods and materials sectors are likely to see more front-loaded returns. Onto the call of the day from Morgan Stanley, which in the same vein says it’s turned “even more bullish” on China. A team led by Laura Wang kept an overweight rating and raised their year-end target on the MSCI China index from 70 to 80. (The iShares MSCI China ETF MCHI, +0.36% ended Monday at $52.43.) It also lifted its China GDP growth estimate by three tenths, to 5.7%, which is ahead of the consensus 4.8%.

Chinese stocks have been on a tear. Morgan Stanley says it's turning even more bullish on China.

European and British gas prices have fallen by almost 80pc since the panic buying in August. The benchmark TTF contract dropped below €70 per megawatt hour last week and is back to the levels just before the invasion of Ukraine.  Futures prices have fallen pari passu for next winter as well, and for the winter after that. The market is no longer pricing in a protracted supply crisis caused by the cut-off in Russian gas. The world has adapted remarkably well to Vladimir Putin’s energy war.

Time to end the catastrophism – Putin’s gas weapon has been spiked

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Perhaps the main reason stocks greeted the CPI data with disappointment was that investors had positioned for inflation to fall even more aggressively. Some even hoped that the drop would be large enough to prompt the Federal Reserve to reconsider more interest-rate hikes. Ahead of the CPI data for October and November, economists had actually underestimated the degree by which price pressures would recede, on a year-over-year basis. And as prices for goods like used cars and for oil and other commodities declined late last year, traders anticipated they might be too conservative again in December. As a result, a “whisper number” shared among markets professionals suggested that core inflation — which is the Fed’s main focus — would slow even faster than economists were expecting, according to Bill Sterling, global strategist at GW&K Investment Management. Instead, the core level, which omits volatile food and energy prices, rose 0.3%, matching the median forecast from economists polled by The Wall Street Journal.

Why the stock market isn't impressed with the first monthly decline in consumer prices in more than 2 years

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Last week, Spiegel International reported on a country where carnivores can already legally dine on meat that is produced from the stem cells of animals. As the article put it: Just imagine for a moment that you could save the world with chicken nuggets. All you would have to do is just eat them. Your teeth would sink into real meat, yet no animal would have lost its life for your meal. It will have been grown in the laboratory from a single chicken cell. Imagine that there would suddenly be enough meat from the laboratory to feed everybody in the world. Hunger would be a thing of the past. The land now used to grow corn for animal feed could be repurposed, perhaps even for a forest that could draw CO2 out of our atmosphere. Industrial livestock farming would no longer be needed. To be sure, solutions that sound so simple should be approached with caution. But there is a place where the utopia described above isn’t as far away as it might sound. Where such laboratory chicken can be tasted and where the nuggets are being served up on real plates. That place is Singapore.

The Coming Meat Utopia Is Real

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A seismic policy shift by Japan's central bank is still a matter of when not if, say investors now hunkering down for fresh havoc in bond markets and wild swings in currencies. The Bank of Japan on Wednesday maintained ultra-low interest rates, including a bond yield cap it was struggling to defend, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure. Advertisement · Scroll to continue Analysts say a policy change is inevitable at some point given that Japanese inflation is at 41-year highs and the cost of keeping borrowing costs down rises.

Analysis: BOJ has markets bracing for more bond, FX turmoil as shift seen inevitable | Reuters

Wall Street’s fear gauge has fallen to its lowest level in months, and Wall Street strategists are concerned it could be a warning that the latest stock-market rally is coming to an end. Specifically, they’re worried that the low level of the Cboe Volatility Index, otherwise known as “the VIX,” suggests that investors may have become complacent about the risks to their portfolios, raising the possibility that they could be caught off guard in a way that exacerbates the potential market mayhem, according to a series of research notes sent to clients and reviewed by MarketWatch. Others said they’re worried the low VIX will soon revert to its long-term average, bringing the latest market rebound to an end.

Wall Street's 'fear gauge' flashes warning that stocks might be headed off a cliff

Average pay, including and excluding bonuses, rose by 6.4% between September and November compared with the same period in 2021, official figures show. It is the fastest growth since 2001, excluding during the height of Covid, but when adjusted for rising prices, wages fell in real terms by 2.6%. The gap between public and private sector pay is also near a record high...

Private sector wages grew 7.2% annually in the three months to November, which was more than double that of the 3.3% increase in the public sector, according to the Office for National Statistics (ONS).

Pay rises at fastest pace for over 20 years, but below inflation

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Start with the biggest loser of the day, the Dow Jones Industrial Average (^DJI), which was down 1.81%, or 614 points, on Wednesday, its worst showing in over a month. As of late December, the Dow had outperformed the Nasdaq by 20 percentage points — the most since the dot-com bubble crash two decades prior. Despite this outperformance, however, the Dow ended 2022 down nearly 9%. There were few places for investors to hide in 2022. But Wednesday, the Nasdaq outperformed the Dow by 57 basis points. Particularly notable coming on such a negative day for the market. 

In the first 11 trading days of the year, the Nasdaq is already up 4.69% compared to the Dow's meager 0.45% gain. If we dive inside the benchmark S&P 500 and look at relative sector performance, 2023's year-to-date sector chart is nearly the inverse of 2022. Last year's second-worst-performing sector is this year's best: Consumer Discretionary (XLY). Helping matters are the sector's two largest megacap components — Amazon (AMZN) and Tesla (TSLA) — which are both nicely positive so far in 2023, gaining a little over 4% each. The two other sectors besides consumer discretionary that house some of the market's biggest names — Tech (XLK) and Communication Services (XLC) — are also serving as leaders this year.

The 2023 investment narrative is already diverging from 2022: Morning Brief

our call of the day from Jefferies tackles that idea. “Disinflation is a key assumption for our road map for 2023,” says Desh Peramunetilleke, global head of microstrategy, and analyst Mahesh Kedia, in a note to clients on Thursday. “The 1980s disinflation cycle brought about by higher rates and easing supply side pressures provide a good template for the current cycle. Broadly, quality growth stocks/sectors did better than value, and small-caps underperformed,” said the pair. What did well from April 1980 to February 1983 was the consumer, with business services, staples and consumer services outperforming, while commodities and industrials did less well. Buying quality and avoiding value was also a smart move, they add.

 The 1980s was the blueprint for the upcoming disinflation cycle and these are the stocks for it, strategists say - MarketWatch

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All of this squabbling suggests that many world leaders now see the energy transition as not only inevitable but lucrative—a source of prosperity and jobs. This “race to the top” approach to tackling climate change is new, according to Jessie Jenkins, an energy-policy researcher at Princeton. “For decades, the climate challenge has been framed as a collective-action problem,” he told me, “a tragedy of the commons that demanded shared sacrifice.” 

Now, instead of requiring sacrifice, fixing the climate is seen as having “significant economic, security, and geostrategic benefits.” Global investment in decarbonization surpassed $1 trillion in 2022—on par, for the first time, with investments in fossil fuels. For longtime observers of international climate policy, the shift feels seismic. Watching countries jockey for position in industries that were once considered niche sideshows is “thrilling,” Alice Hill, a senior fellow at the Council on Foreign Relations, told me.

Europe Has Green-Energy FOMO

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“We believe that the equity rally is unlikely to get the fundamental confirmation for the next leg higher. Once positioning recovers, Q1 is in our view likely to mark the high point of the market. We think that one should be using the ytd gains to cut equity allocations, and to reduce portfolio beta,” said Kolanovic and the team. They say international equities — China/EM, Japan and Europe — “offer better risk-reward than U.S. equities.” This latest warning adds emphasis to Kolanovic’s assessment last month that the rally’s days were numbered. 

Now hold on you say? Wasn’t this the guy who was bullish all of last year, to no great end? In JPMorgan’s defense, they say an underweight position on government bonds and overweight on commodities compensated for 9-month equity overweight last year, helping them edge past the benchmark. Still, Kolanovic might have a lot riding on this bet, as others on Wall Street chime in. Chris Montagu and the team at Citigroup, for example, told clients they see fading bullish momentum for stocks, apart from European banks. What JPM sees hurting this rally is recent weaker economic data and the anticipated weak earnings and guidance from the latest reporting season. “Recent equity inflows are likely running out of steam, while pensions’ overfunded status could drive an increase in their reallocation from equities to bonds this year,” they said.

The peak of this market rally is almost here, says JPMorgan. Time to ditch U.S. stocks, and buy these instead, says Wall Street giant.

Inflation picked up in the first month of the year, defying optimism from investors and officials over a steady move lower seen in recent readings. The Consumer Price Index (CPI) for January showed a 0.5% increase in prices over the past month, an acceleration from the prior reading, government data showed Tuesday. On an annual basis, CPI rose 6.4%. Economists had expected prices to climb at a 6.2% over the year and jump 0.5% month-over-month, per consensus estimates from Bloomberg. New seasonal adjustments released by the BLS on Friday also switched December's initial reading of a 0.1% monthly drop in headline inflation to an increase of 0.1% in the year's final month. On a "core" basis, which strips out the volatile food and energy components of the report, prices climbed 5.6% year-over-year, more than expected, and 0.4% over the prior month. Forecasts called for a 5.5% annual increase and 0.4% monthly rise in the core CPI reading.

Inflation rises 0.5% over last month in January, most since October

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BP’s Energy Outlook this month is in many ways an extraordinary document. It concluded that global demand for oil and fossil fuels peaked in 2019, with even China close to rolling over. It has rung the bell that tolls for Big Oil.

Climate activists would applaud BP if they had more political sense