Global financial markets are preparing for a potentially turbulent week ahead as investors weigh conflicting economic data and central bank messaging. Last week brought a mixed bag of news on growth and inflation along with hawkish signals from some major central banks. This combination of uncertainty has markets on edge.
Growth Concerns Weigh On Markets
Several key economic releases last week indicated slowing growth in major economies. In the US, manufacturing and services PMIs dropped more than expected with services falling to a 2-year low. The declines suggest the Federal Reserve’s aggressive rate hikes over the past year may finally be impacting activity.
US Flash PMIs (January)
| Sector | Actual | Expected | Previous |
|-|-|-|-|
| Manufacturing | 46.8 | 48.0 | 46.2 |
| Services | 46.6 | 47.0 | 49.6 |
In the Eurozone as well, PMIs indicated contraction with services at a 20-month low. However, investor concerns were tempered somewhat by resilience in the German economy.
Eurozone Flash Composite PMI (January)
| Sector | Actual | Expected | Previous |
|-|-|-|-|
| Manufacturing | 48.8 | 49.0 | 47.8 |
| Services | 50.7 | 51.2 | 49.8 |
| Composite | 50.2 | 50.2 | 49.3 |
Meanwhile in China, Q4 GDP growth of 2.9% undershot estimates, capping the weakest year of expansion since 1976 outside of pandemic lockdowns.
These disappointing numbers have raised worries about demand erosion from high inflation and tighter financial conditions. Stock markets fell globally last week in response.
Hawkish Central Banks Add to Uncertainty
Despite signs of economic slowdown, several major central banks reiterated hawkish stances last week. The Bank of Canada surprised markets with a 25bps rate hike even as it lowered 2023 growth forecasts. The European Central Bank also showed determination to tame inflation by leaving the door open to further significant hikes.
Markets are now pricing in peak rates of around 5% for the Federal Reserve, 4.5% for the Bank of Canada and 3.5% for the ECB through 2023. This policy outlook continues to support the US dollar near multi-year highs.
Commodity Complex Flashes Warning Signs
Commodity markets, often seen as a barometer of global growth, flashed warning signs last week. Gold prices broke key support to trade at 9-month lows below $1,900/oz. Industrial metals like copper also tumbled over 4% on demand worries.
Meanwhile, oil prices erased early January gains as signs of slowing demand added to existing supply-side concerns. Brent crude fell back below $86/bbl while WTI crude dropped under $80/bbl.
Key Commodity Prices - Week Ending January 20
| Commodity | Price | Weekly Change | YTD Change |
|-|-|-|-|
| Gold | $1,890/oz | -2.3% | +3.4% |
| Copper | $8,860/tonne | -4.1% | +7.9% |
| Brent Crude | $85.92/bbl | -1.9% | +4.1% |
| WTI Crude | $79.68/bbl | -1.1% | +5.9% |
This reversal in commodities hints that markets may be on the cusp of a broader growth scare.
Currencies and Equities Position Defensively
In currencies, safe havens like the Japanese Yen and Swiss Franc outperformed last week even as the US dollar held near multi-year highs. The Yen rallied from 7-month lows despite a dovish Bank of Japan while the Franc benefitted from SNB tightening signals.
Equity markets saw investors rotate into defensive sectors like healthcare and utilities at the expense of more growth-sensitive tech and consumer discretionary shares. US and European indices managed modest weekly gains but emerging markets bore the brunt of growth fears.
Outlook Hinges on Growth Trajectory
Markets face a complex set of signals on growth, inflation and policy heading into a pivotal week. Key Q4 GDP data out of the US could affirm or dispel recession worries while central bank meetings in the US, Eurozone and UK will look for any shift in tone.
If data continues to deteriorate, markets may test the resolve of hawkish central banks worried about losing credibility after a year of inflation forecast errors. Any indication of wavering could spark a relief rally in bonds and equities along with a pullback in the dollar.
However, even slightly upbeat data or renewed central bank hawkishness could see another leg higher in the dollar, a selloff in bonds and further pressure on overvalued equity markets. Traders brace for fresh volatility as the growth debate steals focus.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
