A review of the week’s top global economic and capital markets news.
As of noon on Friday, global equities were higher on the week amid further evidence that US inflation continues to slow. The yield on the US 10-year Treasury note fell 0.13% from the week before, to 3.47%, while the price of a barrel of West Texas Intermediate crude oil added $4 to $78.75. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 19.3, close to its lowest level in a year, from 21.5 a week ago.
MACRO NEWS
US inflation eased in December
Growth in consumer prices in the United States decelerated for the sixth straight month in December. The Consumer Price Index declined 0.1% from November and rose a more moderate 6.5% from a year earlier, down from November’s 7.1% pace. Since CPI peaked at 9.1% in June, falling energy and goods prices have contributed to the more measured pace of price gains, gains that have been concentrated largely in the cost of services. However, core services inflation ex shelter, a measure that US Federal Reserve Chair Jerome Powell recently highlighted as a focus for policymakers, ticked up to 7.4% year over year. That uptick, along with jobless claims data that suggest that the labor market remains exceptionally tight, failed to dent investor optimism that the Fed tightening cycle is nearing its end. Futures markets expect the Fed to hike 0.25% on 1 February and again on 22 March before pausing. Late this week, several FOMC members said that they expect to hike rates in smaller increments going forward.
World Bank expects slower growth
The World Bank slashed its 2023 growth outlook and warned of a global recession. It expects 1.7% global growth this year, about half the pace it forecast in June. “The combination of slow growth, tightening financial conditions and heavy indebtedness is likely to weaken investment and trigger corporate defaults,” World Bank President David Malpass said.
White House says Yellen to stay on
Senior White House officials confirmed this week that US Secretary of the Treasury Janet Yellen will remain in her post for a third year. It is not unusual for cabinet officers to leave their positions after the midterm elections. Yellen drew criticism earlier in Biden’s term for her belief that inflation would be transitory, a mistake that she has acknowledged. With the prospect of a looming fight over the nation’s debt limit in Congress, Yellen, a former Fed chair, is well-placed to warn against the perils of a potential default.
Japan’s PM lays groundwork for normalizing interest rates
After working together for the past decade to overcome persistent deflation, the Bank of Japan and the Japanese government must now each play their own role, Japan’s prime minister, Fumio Kishida said last weekend. Under the new BOJ governor, who will be chosen soon by Kishida, the government and central bank will have to discuss their relationship, the prime minister said. Investors took the comment as a signal that the groundwork is being laid for an exit from the BOJ’s superloose monetary policy and pushed yields beyond the central bank’s 0.50% yield cap on the 10-year Japanese government bond, forcing the BOJ to buy bonds to limit a further backup in yields.
Special counsel investigates Biden
US Attorney General Merrick Garland appointed a special counsel to investigate the potential mishandling of classified documents by US President Joe Biden after his vice presidency ended in 2017 but before he was sworn in as president in 2021. The documents were discovered in November in Biden’s former office at a Washington, DC think tank and at his home in Wilmington, Delaware.
QUICK HITS
As earnings season gets underway, analysts expect a 4.1% year-over-year decline in Q4 S&P 500 earnings, the first contraction since Q3 2020.
China this week ended the requirement that incoming travelers quarantine and now requires only a negative COVID test to enter the country.
Taiwan’s exports fell for the fourth straight month in December as global demand, particularly for semiconductors, softened.
The Federal Reserve Bank of New York’s December Survey of Consumer Expectations found that one-year-ahead inflation expectations declined to 5%, the lowest reading since July 2021. Household spending expectations declined sharply to 5.9% in December from 6.9% in November while income growth expectations rose to 4.6%, a series high.
The US budget deficit widened 12% in the first quarter of the fiscal year as interest payments on the national debt soared 37%. From October through December, the deficit reached $421 billion. The budget gap for 2022 came in at $1.38 trillion, down from $2.78 trillion the prior year during some of the worst of the pandemic.
Bank of England Chief Economist Huw Pill said this week that inflation pressure may be easing as the labor market cools, though he warned of the potential for inflation to prove more resilient.
Australian inflation reaccelerated to 7.3% year over year in November after dipping to 6.9% in October. A core measure of inflation, the trimmed mean, rose 5.6%, its highest level since 2018.
The Bank of Korea raised rates by 0.25% to 3.25% on Friday, as expected.
According to the University of Michigan Consumer Sentiment Survey, one-year inflation expectations declined to 4% in January from 4.4% in December, though expectations 5 to 10 years in the future ticked up to 3% from 2.9%. Consumer sentiment rebounded strongly this month, to 64.6 from December’s 59.7 reading.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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