Markets Wrap (7–20 February)
Banking stocks are some of Europe's top performers so far in 2023 as Stoxx Europe 600 Banks soared by almost 19% – almost twice the broad market benchmark. The rise of interest rates has had an effect of a tide that is lifting all boats and recent quarterly earnings were largely better than expected. Market sentiment towards the sector has also been lifted by numerous buyback announcements. The sector's profit projections are up significantly, defying the general market downtrend (Chart 1).
Consumer price growth in the US is decelerating, but at a lower pace than expected, whereas wholesale inflationary pressure has even strengthened recently. This is the conclusion the market has come to following recent data. CPI (6.4% y-o-y) and core CPI (5.6%) January readings were above the median forecast by 0.2 and 0.1 pp respectively, whereas the producer price m-o-m index, after falling by 0.5% in December, rose by 0.7%, or 0.3 pp more than expected. Soon after the data were released, several FED officials said they would support a 50 bps hike in March – just one month after the pace of tightening was reduced to 25 bps in February.
January CPI in Sweden came in a tad below the median forecast (11.7% versus 11.8%), but excluding food and energy, prices grew 0.5 pp more than expected (8.7% versus 8.2%). With no turnaround for core inflation despite a very high base, another hike by the Riksbank now looks all but inevitable, whereas the probability of a double (50 bps) hike shot up from close to 0% to over 50% in just one week.
Following a surprisingly large inflation drop in the UK, the Bank of England hiking cycle may be on the horizon. January CPI fell from 10.5% in December to 10.1% in January, whereas core inflation slowed even more, from 6.3% to 5.8%. Both measures were below consensus estimates of 10.3% and 6.2% respectively. The key detail in the latest inflation report was a sharp drop in services inflation. Another lower than expected inflation reading would probably be enough for the central bank to keep rates on hold on 23 March.
Tight labor market and strong consumer spending are among the factors that complicate the FED's mission to quell inflation. Bloomberg Intelligence study shows that US retail sales are rising at a staggering pace – namely, three times faster than in the past two economic cycles. Monthly retail sales are up by almost 31% since the end of 2020, and it took just three months for this metric to reach a new high after the recession (for comparison – following the 2009 downturns, 25-month span was needed to reach a new record level).
February industry PMI indices of the Eurozone's largest economies fell short of expectations, but the state of the services sector turned out to be better than expected, resulting in a composite PMI of 52.3 points – the highest in 9 months and significantly above the Bloomberg median forecast of 50.7 points (Chart 6). ZEW institute index of expectations of economic growth rose to the level unseen since before the Russian invasion in Ukraine.