February 2023 Summary:
In January, the stock market had a strong rally after the Federal Reserve's expectations to ease the rate trajectory. However, February brought an entirely different perspective; The Fed raised the benchmark rate by 25bps up to 4.75%, with further increases of 25bps anticipated in March and May as well. This created a shift from expecting rate cuts late in the year towards keeping them higher for longer - something that was not priced into markets previously. The terminal rate in the US has jumped to approximately 5.4%. This surge in rate expectations was mainly due to the impressive job numbers, with Change in Nonfarm Payrolls clocking a stunning +517K - way beyond the expected 189K figures. Average hourly earnings maintained its above-average 4.4% YoY, particularly within Leisure and Hospitality, which saw an incredible 7% gain.
After the hot jobs report, inflation data reported mostly in line with expected MoM readings, though services inflation stretches higher than usual. Prices for housing saw a dip as mortgage rates inched up, while commodities continued to drop lower. January's CPI registered 0.5%, which was equal to expectations and 6.4% YoY, outperforming predictions of 6.2%.
In addition, the January PPI data was hotter than anticipated, with monthly growth of 0.7%, exceeding the expected 0.4%. The YoY results also outshone expectations, coming in at 6.0% compared to 5.4%. Similarly, underlying PCE figures were higher than forecasted too - recording an increase of 0.6% from last month and giving a YoY figure of 5.4%, versus a predicted 5%.
FOMC:
February was a month filled with economic data and FOMC rate decisions, as well as 4Q '22 earnings prints. This time around, the market responded positively to earnings surprises by rewarding those companies who posted higher-than-expected numbers with an average price increase of 1.1% over four days (above their 5-year average of 0.9%). On the other hand, any negative surprises weren't punished nearly as harshly; instead, seeing a decrease of just 0.6%, compared to its usual -2.2%.
US Equities:
For the month, large-cap growth stocks were the relative outperformers, with Nasdaq 100 only falling by -0.4% and the Russell 1000 Growth index dropping -1.2%. Large-cap value stocks took a harder hit as they dropped by -3.5%, while the Russell Microcap index fell -2.9%. The energy sector was notably weaker, dropping -7.1%, followed closely by REITs and Utilities, which decreased by -6.2% and -5.9%, respectively.
US Earnings Data:
S&P 500 companies' Q4 earnings reports have proven to be underwhelming, with 96% of firms having revealed their results. Only 68% of companies reported higher-than-expected EPS, lower than the respective 5 and 10-year averages at 77%, and 73%. It's worth noting that the average EPS beat was about 1%, which is significantly less than the 5/10-year averages of 8.6%, and 6.4%. The Communications sector has been a major contributor to weak overall earnings figures; however, Consumer Discretionary outperformed expectations by considerable margins in comparison.
Mortgage Markets and Rates:
The US2Y/US10Y spread continued its inversion, closing out the month at -89bps. After staying relatively stable since 4Q '22, the yield of the US2Y bonds suddenly skyrocketed to a record high near 4.8%, while the US10Y bond yields stayed below their October '22 highs and eventually settled around 3.92%. During the month, mortgage rates in the US soared to around 6.8% for a 30-year fixed rate. The S&P/Case-Shiller U.S. National Home Price Index (non-seasonally adjusted) observed an annual gain of 5.8% in December (3x average closing prices from October, November and December).
The Months Ahead:
March is full of noteworthy events, with the FOMC decision on the 22nd being one of them. The market anticipates a 25bp raise from the committee, but according to recent Federal Reserve minutes, some members favoured a 50bp increment during their February session. Two crucial data releases are slated; Nonfarm Payrolls numbers will be revealed on the 10th, while Consumer Price Index (CPI) follows suit approximately four days later - and don't forget that both were pleasantly surprised in February. Equities sold off sharply when bond yields rose in February, meaning bonds will continue to dictate equity prices in the short term.
Despite slipping out of the international spotlight, the conflict in Ukraine is still a dangerous reality that could very easily cause markets to crash if tensions continue to rise. To make matters worse, recent events such as China shooting down an alleged "spy balloon" have further strained relations between these two major powers. Any more issues on this front would wreak havoc with global trade activities.