Both equity and bond markets managed to carry the momentum of the good start into 2023 to the second trading week of this year. The broad US equity market gained about 2.6%, the European market about 2%. Due to the fall in yields on the bond markets – 10Y US Treasury bonds are traded at a yield of around 3.5% *) – the technology sector and, especially in Europe, the real estate sector outperformed the overall market.
Additional rate increases necessary
The positive factors clearly prevailed last week. For the time being, we can see a good combination of the labour market remaining in good shape and wage pressures rising less significantly. Therefore, the probability of second-round effects on inflation has declined. It is important to bear in mind the level of wage increases, which will make further interest rate increases necessary.
Consumer confidence in the USA on the increase
The US inflation rates were published last week exactly to the decimal point, as predicted. Headline inflation over the last twelve months was 6.5%, the core rate excluding the volatile energy and food components was 5.7%. A bigger surprise was delivered by the University of Michigan’s consumer confidence index: consumer sentiment, which had been trending downwards since the outbreak of the Corona pandemic mainly on the back of rising prices, came as a significantly positive surprise relative to estimates.
The important 12M forward estimate of inflation also fell to now 4.0%. One of the main goals of central banks is to contain inflation expectations.
The risk of recession is on the decline
In Europe, the steadily falling gas price helped to dampen inflation expectations a little. The renewed rise in crude oil and industrial metals, but also in the price of gold, illustrate that the price trend for commodities and precious metals remains volatile. The opening of China from the Covid restrictions has raised expectations of rising demand for these commodities and has overall contributed to a more positive assessment of the global economy. Numerous analysts are in the process of revising their forecasts, now assuming a lower probability of recession for the USA and especially for Europe.
European equity allocation increased in the Erste AM funds
In our mixed funds and asset management portfolios, we have left the equity portion at a neutral level. While the positive factors on the inflation side are boosting the markets, the possibly more negative factors affecting the economy and corporate results are still pending. In the equity segment, we took advantage of the positive momentum and the more favourable valuation of continental European equity markets and increased the allocation. We like small cap companies (i.e. companies with a stock market value in the two to three-digit million range). At the same time, we reduced the weightings of Japan and the USA. In Japan we can currently see an interesting change in central bank policy. The successor of the outgoing central bank governor, Haruhiko Kuroda, could once again bring the interest rate policy back into a somewhat less expansive range.
*) Source: Erste AM, 16 January 2023
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