US economic landing: hard, soft or nothing at all?
1st March 2023 15:24
by Graeme Evans from interactive investor
At the end of a mixed month for stock market performance, City analysts assess the possible impact of high growth and high inflation on the world’s largest economy.
The outperformance of London shares continued during February as a jittery Wall Street considered a third possible scenario for the US economy of no landing at all.
Traders have previously focused on either a hard or soft landing from high inflation, but that all changed last month after stronger data on the labour market and consumer prices.
The new term circulating on Wall Street involved a scenario where inflation remains high and growth is also strong, causing the US Federal Reserve to hike interest rates further.
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As a result, futures pricing for the Federal Reserve’s terminal rate went from 4.92% to 5.42% during the month and from 4.48% to 5.28% for the December meeting. The current level is in a range of 4.5%-4.75% after a rapid tightening of monetary policy during 2022.
The realisation that policymakers may have more to do slammed the brakes on US shares after a strong performance during January. The S&P 500 fell 2.6% and the tech-focused Nasdaq lost 1.1%, with the 4% fall for the Dow Jones Industrial Average wiping out its year-to-date gains.
Deutsche Bank strategist Henry Allen said: “After a very strong start to the year for financial markets, February saw that go into reverse, with losses across equities, credit, sovereign bonds and commodities.
“That came amid growing concern about the persistence of inflation, which in turn led investors to ramp up their expectations for central bank rate hikes.”
He said it had been a particularly awful month for bonds, with Bloomberg’s global aggregate bond index experiencing its worst February performance since its inception in 1990.
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One of the few assets that benefited from the shift in Federal Reserve pricing was the US dollar, which strengthened against every other G10 currency during the month. The dollar index rose 2.7% to end a run of four consecutive monthly declines.
The dollar resurgence came after non-farm payrolls rose by 517,000, marking the strongest job growth in six months and resulting in an unemployment rate at a 53-year low of 3.4%. This was followed by upward revisions to inflation data from late-2022.
These trends were not confined to the US, however, with this week’s inflation figures from Europe also higher than expected.
But European equities have been most robust, with gains for the FTSE 100 index of 1.3% in a month when London’s top flight traded above 8,000 for the first time. It is up 5.7% for the year to date.
London’s February resilience came despite all major commodity assets losing ground during the month, putting pressure on stocks including Anglo American (LSE:AAL) and Rio Tinto (LSE:RIO).
For energy, there were significant declines in European natural gas along with a smaller loss of 0.7% for Brent crude. Metals struggled too, with copper down 3% and gold 5.3% lower, having previously recorded three consecutive monthly gains.
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