Market Update – 22nd February 2023.

24th February 2023

Markets got off to a slow start this week with the US markets closed on Monday for Presidents Day. Investors readily await the Fed minutes due later today (22 February) from the last policy meeting on the 1 February which concluded with a 25-basis point hike. As usual, markets will be looking for clues about the outlook for the US economy, weighing in on comments from Fed officials as to how much further the Fed is willing to go in their fight against inflation.

Flash PMI data was released this week for the US, UK & Eurozone. A reading below the 50.0 threshold indicates contraction, while a reading greater than 50 suggests growth. PMI offers policymakers an insight into the general economic trends within the manufacturing and services sectors and so they will be analysing this data closely.

In the UK, composite PMI (which includes manufacturing and services activity) rose sharply in February to 53.0 up from 48.5 in January 2023, beating market forecasts of 49.2. The latest figure marked the highest PMI reading in nine months, after strong expansion in business activity was helped by improving economic outlook and less political uncertainty.

Over in Europe composite PMI for February moved into expansion. PMI rose to 52.3, up from 50.3 in January, as the index was led higher by the services sector after a revival in growth in financial services activity and tourism.

Looking to the US, composite PMI rose to 50.2 in February 2023, up from 46.8 in the previous month, and above expectations of 47.5. The latest reading was the highest for eight months, led by the services sector. Better than anticipated PMI data for February indicates resilience within the economy despite higher interest rates. After hotter than-expected US CPI last week, some investors were concerned the data would bolster policymakers to be more hawkish when considering the next policy move.

Friday (24 February) will mark a year since Russia’s invasion of Ukraine. The impact of the ongoing conflict has been felt around the world. Over the last year, tens of thousands have lost their lives and a reported 8.1 million people have been displaced from Ukraine into Europe. The unprovoked war has put huge pressure on commodities like energy and fuel, causing prices to surge. This, combined with supply chains that have already been under strain post-pandemic, have pushed inflation rates globally to historic highs.

Due to Europe’s over reliance on Russia as a source of gas and oil, the region has been hit harder over the last year. The west has introduced sanctions aimed at weakening Russia’s ability to finance the war and target the economic elite.

This week President Vladimir Putin blamed the west for escalating the war and announced he was suspending the nuclear arms control treaty agreed upon with the US in 2010. Meanwhile, after US president Joe Biden’s surprise visit to Kyiv, Biden affirmed that US support for Ukraine will not ‘waver’. The US is the largest provider of military assistance to Ukraine, having committed $30 billion since the start of the Biden administration. Whilst China has abstained from taking sides, President Xi Jinping is due to deliver a peace speech on the anniversary and is set to enter talks with Moscow to play a more active role in bringing the year-old war to an end. With neither side looking set for victory, nor showing signs of backing down, there looks as though there will be no resolution to the war anytime soon.

As well as the minutes from the Fed’s last policy meeting, this week we are expecting the release of Japanese CPI and US PCE.

Investment Management Team