Market and Economic Summary
After a strong start to the year, markets gave up some of their year-to-date gains in the month of February. This was on the back of stronger economic data, which led market participants to become concerned about interest rates staying higher for longer, rather than the previously expected pivot in 2023. The recent rebound in China also came to an abrupt halt, as the improved sentiment on the back of the Chinese economy reopening was replaced by concerns around government debt levels and the long-term prospects for the local economy. The deterioration in sentiment led to the majority of major global equity markets ending the month lower, with those emerging economies reliant on global growth being the most heavily impacted.
Most inflation reports continued to trend lower in February, as transport inflation continues to slow. However, the inflation rates continue to remain above most central banks’ targets. The annual inflation rate in the US slowed for a sixth straight month to 6.4% (year-on-year to the end of January), higher than market forecasts of 6.2%. Euro area inflation fell to 8.6% (year-on-year to the end of January), the lowest since May 2022, and slightly higher than consensus forecasts of 8.5%, with a slowdown in energy inflation being the largest contributor to the decline. The annual inflation rate in the UK fell to 10.1% (year-on-year to the end of January), from 10.5% in December, lower than market consensus. The annual inflation rate remains in double digits for the UK; however, inflation seems to have peaked at 11.1% in October. China’s annual inflation rate rose to 2.1% (year-on-year to the end of January), slightly lower than market consensus. Food prices jumped on the back of the Chinese Lunar New Year Festival and the relaxation of Covid-19 restrictions.
Moving to central bank actions over the month, the US Federal Reserve (Fed) raised the target range for the fed funds rate by 0.25% to 4.5%-4.75% in its February 2023 meeting, reducing the size of the increase for a second straight meeting, but still pushing borrowing costs to the highest since 2007. This was on the back of a welcome decrease in