Market Update – 8th March 2023.

9th March 2023

Markets got off to a slow start this week, failing to make traction with investors weighing in on Fed Chair, Jerome Powell, who spoke on Tuesday (7 March 2023) before the Senate Banking, Housing and Urban Affairs Committee and is set to address the House Financial Services Committee today (8 March).

At the semi-annual testimony to congress, J Powell stated “If the totality of the data” warrants, the Fed is “prepared to increase the pace of rate hikes”. He explained that due to stubbornly high CPI data and a tight US labour market, “the ultimate level of interest rates is likely to be higher than previously anticipated”. His testimony comes after US CPI data showed that inflation unexpectedly rose in January, markets have now increased their bets of a 50-basis point hike at the next meet on the 22nd of March. Powell’s comments left those hoping for an early pause in hikes disappointed with stocks moving lower on Tuesday, however, it could be said that higher rates were already priced into the market to a certain degree.

US factory orders dropped by 1.6% on month in January 2023 after increasing by 1.7% in December 2022, which was better than market forecasts of a 1.8% drop. The drop in orders in January was mostly attributed to a 13.3% decline in transportation equipment, which was weighed down by a 54.5% tumble in orders for civilian aircraft. With the Fed now expected to raise rates further, a quick turnaround in manufacturing is unlikely.

Policymakers await non-farm payroll and unemployment rate data which is due out later this week to gauge whether the labour market is showing any signs of loosening. However the labour market hasn’t shown any indication that an economic downturn is close and so more robust data could push the Fed closer to making a 50-basis point hike.

China’s National People’s Congress is well underway in Beijing. So far, the government has announced its plans to increase its military spending by more than 7% this year to around $225bn, although this is still less than that of the US, which is four times greater. Officials have also announced that the country will pursue an economic growth target of around 5% this year as well as plans to expand fiscal support for the economy. This congress meeting is of particular significance as delegates are expected to remodel several key communist Party and state institutions.

China’s trade surplus over the first two months of 2023 increased to an all-time high at $116.9bn, greater than expected, with exports declining at a year-on-year rate of 6.8% and imports falling by 10.2%. The data was a result of worsening global demand as export data elsewhere is also weakening, given persistent high inflation in the US and Europe. China is still in the early stages of its reopening story after it fully relaxed restrictions going into 2023. Recent data has pointed to a strong reversion within services and manufacturing sectors as the government continues with supportive measures to revive the economy.

Still to come this week from the US we have; labour market data, non-farm payrolls and the unemployment rate as well as balance of trade. Chinese CPI, Japan interest rate decision and UK GDP.

Kate Mimnagh, Portfolio Economist