The global economy continues to show remarkable resilience, ending 2022 on a positive note, write Guy Wagner and his team in their latest financial market analysis report.
- Probable economic recovery in China from the second quarter at the latest
- The main central banks continue to raise their key rates
- Rising Yields to Maturity in Bond Markets
- Energy was the only sector with a largely positive performance in 2022
“In the United States, the robust performance of the job market, the excess savings built up during the pandemic and the sustained growth of wages are keeping the propensity of households to spend high, with service activities continuing to benefit from an effect catch-up”, says Guy Wagner, chief investment officer (CIO) of the management company BLI – Banque de Luxembourg Investments. “Thanks in particular to a price effect, corporate revenues and profits also remain robust, supporting investment spending. In the Eurozone, the verdict on fourth quarter growth is less clear. Nevertheless, domestic consumption could also prove robust enough to compensate for the moderation in industrial activities.
Probable economic recovery in China from the second quarter at the latest
In China, the abandonment of the zero Covid policy triggered a sharp increase in coronavirus infections, causing a sharp slowdown in activity at the end of the year. “Nevertheless, the gradual normalization of the health situation should ensure an economic recovery from the second quarter at the latest”, thinks the Luxembourg economist. In Japan, weaker external demand could slow export growth, the country’s main economic driver.
The main central banks continue to raise their key rates
As expected, the US Federal Reserve Monetary Committee continued to tighten monetary policy in December. The increase in the target range for the federal funds rate was not 75 basis points as in the previous four meetings, but, as pre-announced, 50 basis points. The federal funds rate is now between 4.25% and 4.50%. For 2023, the Monetary Committee forecasts an additional tightening of 75 basis points by respective movements of 0.25%. In Europe, the Board of Governors of the Central Bank also raised its key rates by 50 basis points, bringing its deposit rate to 2% and its refinancing rate to 2.5%. President Christine Lagarde displayed a particularly restrictive tone by suggesting the continuation of upward movements in increments of 0.5% and by announcing the start of quantitative tightening from March. In Japan, the Central Bank adjusted the upper limit of the 10-year rate from 0.25% to 0.50% as part of its interest rate curve control. According to President Kuroda, this movement does not constitute the start of a tightening cycle, but results from the need to remedy the dysfunction observed in the government bond market.
Rising Yields to Maturity in Bond Markets
Continued monetary tightening by central banks led to a rise in yields to maturity on the bond markets. The rise in yields to maturity was particularly pronounced in Europe due to the prospect of additional increases in key rates by increments of 50 basis points by the ECB. Thus, the 10-year benchmark rate increased in Germany, France, Italy and Spain.
Energy was the only sector with a largely positive performance in 2022
In December, equity markets weakened sharply, causing most equity indices to record significant declines over the whole of 2022. valuation multiples primarily affecting so-called growth stocks in virtually all regions.” Thus, the MSCI All Country World Index Net Total Return global equity index expressed in euros fell by 13.0% over the whole of 2022. The year-on-year drop in the index would have been even greater. if it had not been mitigated by the strength of the dollar against the European currency. Regionally, the S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets index all fell over the month. “At a sector level, Utilities, Healthcare and Consumer Staples held up the best in December, while Communication Services, Consumer Discretionary and Technology declined the most. Over the whole of 2022, energy was the only sector to post a largely positive performance, while all the other sectors recorded a negative evolution,” concludes Guy Wagner.