Market snapshot: GDP number restores optimism, for now

With traders focused on every bit of data for clues as to the health of the economy, our head of markets shares his insight following the latest reports.

Renewed hopes for a soft economic landing cheered investors, as economic growth continued amid the tightening interest rate environment.

US GDP for the fourth quarter grew 2.9% on an annualised basis, versus expectations of 2.8%. The number was boosted by consumer spending, but represents a slight slip from the third quarter reading. Indeed, with there being a time lag between interest rate hikes and the effect on the economy, it remains difficult to predict how much of the Federal Reserve’s actions so far are having the desired dampening effect.

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As such, more pessimistic investors are suggesting that the latest quarter of growth could be the last before previous hikes take full effect, potentially pushing the economy towards recession this Spring. The severity of the recession remains the key element of investor nervousness and, while one economic reading cannot in isolation predict a trend, the GDP number was enough to suggest that a mild recession could be on the cards, sending stocks higher for now.

Next week will provide further colour, with a Fed policy meeting which is expected to result in a further 0.25% rate hike, and with a non-farm payroll release which could well confirm that the labour market remains tight. In the meantime, today will also see the release of the Personal Consumption Expenditure price index, the Fed’s preferred inflation measure, which will give further indications on whether its policy is having the desired effect.

Meanwhile, the current earnings season is in full flow, with mixed messages remaining the order of the day. Although around two-thirds of the companies which have reported so far have beaten estimates, expectations are that earnings will nonetheless have fallen on the whole. The latest updates included a strong reaction to numbers from Tesla Inc (NASDAQ:TSLA) and American Airlines Group Inc (NASDAQ:AAL), the former of which added to tech gains alongside the likes of Microsoft Corp (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN) and Alphabet Inc Class A (NASDAQ:GOOGL). Less positively, stocks dropping after their latest updates included International Business Machines Corp (NYSE:IBM) and Southwest Airlines Co (NYSE:LUV).

With investors scrambling to analyse the current barrage of macro and company information, the main indices have managed to make a decent start to the year. So far in January, the Dow Jones has added 2.4% and the benchmark S&P500 5.8%, while the tech-heavy Nasdaq has had a strong month after a tumultuous 2022, having gained 10% in the month to date.

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Asian markets were also positive, although restrained by a lack of activity from mainland China markets, which are due to reopen on Monday following the Lunar New year holiday. Even so, hopes for a strong recovery following China’s reopening has boosted the broad Asia-Pacific index by over 10% this month following a drop of almost 20% last year.

UK markets took sufficient solace from overnight developments to continue their positive march. In the month to date, the FTSE100 has now added 4.2%, while the beleaguered and more domestically-focused FTSE250 is also attracting some investment interest, pushing the index higher by 5.7% so far after a poor 2022.

In early exchanges, the announcement of a small stake-build which is reportedly for investment rather than acquisitive purposes lifted Sainsbury (J) (LSE:SBRY), while shares in Antofagasta (LSE:ANTO) and Flutter Entertainment (LSE:FLTR) slipped following broker downgrades.