New data has soothed concerns about a prolonged economic downturn, but all eyes now turn to corporate results as US earnings season gets underway this week. Our head of markets has the latest.
Global markets have been boosted by economic numbers from the US which suggested that the aggressive rate hiking policy may at last be washing through to the economy.
Even though Friday's non-farm payrolls report showed the addition of 223,000 jobs versus a consensus of 200,000, investors chose to concentrate on wage growth, where an increase of 0.3% was both lower than expected and a decline from the previous month’s 0.4%. While the report on the whole suggest a labour market which remains relatively strong, the wage numbers served to boost sentiment in not adding to the current inflationary pressures.
The positive news continued with a services PMI which dipped into contractionary territory, lending further weight to hopes of a soft landing for the economy, with expectations for an interest rate rise of 0.25% in February now in pole position. The consumer price index number due on Thursday now takes on additional significance, with forecasts suggesting a further slowdown in both headline and core inflation numbers.
This week also marks the start of the earnings season, with proceedings being opened by the likes of Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and JPMorgan Chase & Co (NYSE:JPM). The consensus is that the banks will have shown little to no year-on-year growth and, in more general terms, earnings are expected to have fallen across the board in the face of margin compression resulting from the inflationary backdrop. In the meantime, the main indices finished higher in a shortened trading week, with both the S&P500 and Dow Jones adding 1.5%, and the Nasdaq 1%.
Asian markets picked up the bullish baton from the US, further boosted by the reopening of borders in China which should allow a surge in travellers into and within the nation for the Lunar New Year celebrations. While the news is accompanied by further inevitable outbreaks of the Covid-19 virus, hopes remain that the economy will finally be able to stage a long-awaited recovery.
Underpinned by support from the central bank if necessary, an ailing property sector and dampened consumer sentiment are both expected to lead the charge in revitalising the world’s second largest economy, which has been severely constrained over the last year by a wave of lockdowns and the country’s previous zero-tolerance policy.
The early year return to a risk-on approach also spilled over to the UK, where the premier index built on its brisk start in the first few days of trading. The FTSE100 index stands ahead by 3.5% so far in 2023, where a raft of established value stocks, underpinned for the most part by generous dividend yields, continue to attract the attention of global investors.
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In early exchanges, stocks with a China interest such as the miners and Prudential (LSE:PRU) continued to thrive, while broker upgrades also lifted the likes of BT Group (LSE:BT.A), Segro (LSE:SGRO) and Land Securities Group (LSE:LAND).
The FTSE250 index also continued its tentative recovery after a parlous 2022, currently ahead by 3.8% in the year to date largely driven by improved global sentiment. However, as a barometer of UK economic activity, the index will remain prone to disappointment as the domestic backdrop continues to feel the pressure of stagnating, growth, higher interest rates and inflation which has yet to be brought under control.
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