Markets last week 24/01/2023

United States

Investors weigh growing recessionary concerns against fading inflationary concerns. The major indices finished the week mixed as recession fears appeared to weigh on sentiment. The Dow Jones Industrial Average performed the worst, giving back a portion of its strong rally in the first two weeks of the year, while the technology-heavy Nasdaq Composite gained slightly. Similarly, the prospect of lower interest rates increased the implicit value of future earnings, allowing growth stocks to outperform. Monday was a holiday for Martin Luther King, Jr., with markets closed.

Several additional signs emerged this week that the economy slowed significantly following the Federal Reserve’s aggressive rate hikes in 2022. The most notable was Wednesday’s report of a 1.1% drop in retail sales in December, nearly triple the consensus estimate. A drop in gas station sales was one factor, but Americans also reduced their purchases of furniture, electronics, and other non-essential items. The November sales figures were also revised downward.

For investors, the upside of the weakening economy was lower inflation pressures. The Labor Department reported that producer prices fell 0.5% in December, the most significant drop since the pandemic’s beginning, as companies paid lower prices for goods, food, and, most notably, energy.
This week also saw the release of data showing that industrial production fell by 0.7% in December, the most since September 2021, owing to a 1.3% drop in manufacturing output. The industrial sector of the economy contracted at an annualised rate of 1.7% in the fourth quarter. Capacity utilisation ended December at 78.8%, its lowest level since 2022 and significantly lower than both the long-term average (79.6%) and consensus expectations.

However, the job market remained unusually tight in this environment, with weekly jobless claims falling to their lowest level since April 2022. Housing starts and existing home sales also fell less than expected.
The yield on the benchmark 10-year note fell to its lowest intraday level in over four months before rising to the end of the week, resulting in positive returns for US Treasuries. (Trends and bond prices move in opposite directions.) Along with the week’s mediocre economic data, the Bank of Japan’s pledge to control the yield curve (see below) aided a rally in Treasuries on Wednesday. Meanwhile, municipals remained in high demand despite limited new supply.

Although banks quickly came to market after reporting, light issuance boosted investment-grade corporate bonds. On the other hand, new deals appeared to drive the majority of sales activity in the high-yield market and were met with strong demand. Although our traders noted that technical conditions for the loan asset class were generally supportive, the leveraged loan market was relatively quiet.


Christine Lagarde, President of the European Central Bank, dismissed market speculation that a drop in energy prices would allow policymakers to slow the pace of monetary policy tightening. During a speech at the World Economic Forum in Davos, Switzerland. She emphasised their aim to bring inflation back to 2% and highlighted that financial markets to revise their policies at heist as the ECB is taking many measures to ensure this.

In the UK, inflation slowed for the second time on a year-on-year basis, and this was due to the lowering of gasoline prices. According to national statistics, the consumer price index dropped to 10.5% from 10.7%. The labour market also remained strong, with the unemployment rate still close to a record low in the three months to November. However, average wage growth (excluding bonuses) in the three months to November was 6.4% higher than a year earlier. Andrew Bailey, BoE governor, mentioned that slowing inflation could be an early sign of an easing within the financial markets.  


The Monetary policy has remained stagnant as the bank of Japan maintained its ultra-low interest rates, leaving its Yield Curve Framework unchanged. Despite growing speculation about further policy change following December’s surprise YCC tweak, the cap on the 10-year JGB yield was raised to 0.50% from 0.25%.

The Bank of Japan stated that medium- to long-term inflation expectations had risen and raised its core CPI forecasts for fiscal years 2022 and 2023, which had also been widely anticipated. The central bank noted that inflation risks are skewed to the upside, leaving the door open for forecasts to be revised at the next release in April. In December, Japan’s core CPI rose 4% year on year, a 41-year high, as businesses passed on increasing costs to consumers. Over the same time period, producer prices rose as well.

Prime Minister Fumio Kishida said this spring that the legal status of COVID could be downgraded to the same level as seasonal influenza, indicating a major shift in Japan’s pandemic restrictions. He stated that the requirements for foreigners entering Japan for testing and quarantine, as well as the requirement to wear face masks to prevent the spread of the coronavirus, would be reviewed. These steps could help re-energise the economy, which is still recovering from the pandemic. Entry restrictions against Chinese travellers where a shift away from the country’s zero-COVID policy has resulted in an increase in infections are likely to remain in place.


China’s GDP increased by 2.9% in the fourth quarter of 2022 and increased by 3.0% year on year. The annual growth rate fell short of the official target of around 5.5% set in March. It was the second-worst year for economic growth after a pandemic-hit 2020 since 1976, when China ended its decade-long Cultural Revolution. Nonetheless, both readings exceeded economists’ expectations after Beijing abandoned its strict pandemic restrictions and implemented a slew of pro-growth policies by the end of 2022.

Meanwhile, December indicators of industrial output and retail sales came in better than expected, while fixed-asset investment rose broadly in line with estimates. Economists predict that China’s economy will recover near 5% by 2023 as infections recede and domestic demand accelerates. Most Chinese provinces have also set growth targets of more than 5% this year, reflecting the government’s priority of boosting economic growth in 2023 through increased consumption and investment.

In monetary policy news, the People’s Bank of China (PBOC) maintained its benchmark one-year and five-year loan prime rates for the fifth month in a row. Many analysts, however, believe that the PBOC will resume easing measures in the near future, following its pledge in December to support a recovery in consumption.

According to National Bureau of Statistics data, the value added by China’s property sector to the overall economy fell 5.1% in 2022 compared to the previous year. Other data showed that new home prices fell 1.5% year on year in December, marking the eighth consecutive month of year-on-year declines. According to Reuters polled analysts, property sales in China will fall for the second year in a row in 2023, but to a lesser extent than in 2022, as economic activity is expected to recover later this year.

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