ClearWater Market Commentary as of January 27th, 2023

Here is the ClearWater Market Commentary as of January 27th, 2023:

In this issue:
– Performance of Major Indices
– Market Commentary
– Last Week’s Key Economic  Events and Upcoming Events

Performance of Principle Indexes: 

S&P/TSX Composite Index
5 Day	1.14%
1 Month	6.86%
YTD	6.86%
1 Year	-0.13%

^{As of 2023/01/27 – Source: www.marketwatch.com}

Index Performances	Last 5 Days	YTD
Nasdaq	4.30%	11.00%
S&P 500	2.45%	4.88%
Nikkei	2.39%	4.28%
Hang Seng Index	2.39%	12.46%
Dow Jones Industrial	1.28%	0.79%
S&P/TSX Composite	1.14%	7.00%
MSCI EAFE	1.10%	7.80%
Russell 2000	1.09%	8.53%
CAC 40	1.04%	9.41%
Shanghai Composite	0.72%	6.40%
DAX	0.37%	8.59%
FTSE 100	-0.59%	5.03%
WTI Crude (Oil)	-2.70%	-1.00%

^{As of 2023/01/27- Source: www.marketwatch.com}

Last week’s and next week’s key economic events:

US economy (S&P 500 2.45%):

• Stocks resumed their winning streak, as investors appeared to welcome some hopeful signals that the economy might skirt a recession in 2023. Consumer discretionary stocks were especially strong, thanks partly to a big jump in Tesla shares over the week following a favorable outlook from CEO Elon Musk.
• The typically defensive consumer staples, health care, and utilities segments lagged. Relatedly, value stocks underperformed growth shares.
• The strong start to the week on Monday was due in part to an article over the weekend by Nick Timiraos, a Wall Street Journal reporter known as the “Fed Whisperer” for accurately predicting previous turns in Federal Reserve policy. Timiraos cited recent comments from Fed governor Christopher Waller, previously an advocate for aggressive rate hikes, in which he highlighted “ample evidence” of slowing demand and said that he would support a quarter-point rate increase at the Fed’s next two-day policy meeting concluding February
• Treasury Secretary Janet Yellen, also notably said last week that she was encouraged that falling energy and easing supply chain bottlenecks were cooling global inflation.
• The week’s inflation data were arguably a little less encouraging, however. On Monday, S&P Global reported that its composite gauge of current manufacturing and services sector activity climbed to 46.6, up from 45.0 in December (readings below 50.0 indicate contraction). While a positive surprise, the report also showed that input prices increased in January, breaking a seven-month streak of declines. The increase occurred despite manufacturing input purchases pulling back the most since May 2020, as firms worked through bloated inventories.
• Indeed, inventory accumulation appeared to provide an unexpected—although temporary—boost to growth in the final quarter of 2022. The Commerce Department reported on Thursday that the U.S. economy expanded at an annualized rate of 2.9% in the quarter, beating consensus estimates of around 2.6%. 
• Friday’s important inflation data came in right in line with expectations, seeming to help foster a modest rally to end the week. The Fed’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index rose 4.4% over the year ended in December, still above the Fed’s 2% long-term inflation target, but well below its 5.4% peak in February 2022 and the slowest pace in 14 months.
• The gains came despite another arguably disappointing week of earnings reports, with companies representing roughly 20% of the S&P 500 Index market capitalization reporting results. Microsoft, the second-most heavily weighted stock in the index, fell sharply after the company reported a larger-than-expected decline in earnings and a slump in revenues that it expects to continue into 2023.

Canadian markets (S&P/TSX 1.14%):

• Bank of Canada increased its benchmark interest rate by a quarter of a percentage point (25 basis points) and it expects to hold rates here for the foreseeable future. After eight consecutive rate increases, this brings the key rate to 4.5%, which means more borrowing costs for consumers carrying variable debt.
• Canadian equities ended the week positive as gains in the IT, Energy, and Clean Technology sectors propelled shares higher. 
• A big market driver this year is the question of whether central banks can tame inflation while achieving a soft landing and so far markets appear somewhat optimistic about that.
• New data released Friday in the U.S. showed inflation continuing to cool in December while consumer spending softened, feeding into the growing sentiment that soon interest rate hikes will be paused by the Federal Reserve. In fact, expectations seem to be favouring a rate cut by the fall. 
• Optimism about rates remains good news for growth stocks, which is likely contributing to the Nasdaq’s outsized gains compared to the other indexes Friday. 
• The Canadian dollar traded for 75.11 cents US compared with 74.91 cents US on Thursday.
• The March crude contract was down US$1.33 cents at US$79.68 per barrel and the March natural gas contract was virtually unchanged at US$2.85 per mmBTU.
• The February gold contract was down 60 cents at US$1,929.40 an ounce and the March copper contract was down five cents at US$4.22 a pound.

Performance 2023: S&P 500 Sectors   

Forward P/E Ratios: S&P 400/500/600 Sectors

European and Asian economies:

• Shares in Europe rose as some encouraging economic data points helped to overcome concerns about the pace of monetary policy tightening. 
• ECB President Christine Lagarde, Knot, and fellow Governing Council member Ollie Rehn repeated their recent calls for “significant” rate increases in February and March. However, others members have commented that “Inflation is still too high, but recent developments suggest that we can fend off the risks of second-round effects and bring down inflation by continuing to adjust our policy rates in a well-calibrated, non-mechanical way.”
• Business activity in the eurozone unexpectedly stabilized in January after contracting for six months, raising hopes that the bloc might avoid a recession. An early reading of the composite Purchasing Managers’ Index (PMI), which measures manufacturing and services output, rose to 50.2 from 49.3 in December 2022, according to S&P Global. PMI readings greater than 50 indicate expansion.
• Consumer confidence in the eurozone strengthened in January, according to the European Commission. The consumer confidence index rose to -20.9. Although analysts had predicted a stronger increase, the figure was still the highest since last February. Meanwhile, investor morale in Germany also picked up at the start of the year, thanks to easing inflation and an improved outlook, the IFO Institute said.
• Business activity in the UK fell to its lowest level in two years in January, as service sector output dropped, according to PMI surveys conducted by S&P Global. The S&P Global/CIPS flash UK composite output index came in at 47.8—down from 49.0 in December. However, optimism on the outlook for the year rose, apparently reflecting hopes of a turnaround in global economic conditions and easing cost pressures, S&P Global said.
• Japan’s stock markets rose over the week, as sentiment was boosted by the U.S. economy registering a solid, albeit slower, growth rate ahead of expectations over the final quarter of 2022, with a 2.9% expansion raising hopes of a soft landing. 
• Investors’ focus was also on Tokyo core consumer price inflation, a leading indicator of nationwide trends, which rose 4.3% year on year in January, exceeding the Bank of Japan’s (BoJ’s) 2% inflation target for the eighth straight month and adding pressure on the central bank to tighten its ultra-loose monetary policy.
• Published during the week, the Summary of Opinions at the BoJ’s January 17–18 Monetary Policy Meeting concluded that it is necessary for the central bank to take some time to examine the effects that the modification of yield curve control decided at its December meeting has on market functioning. (The BoJ expanded the range of 10-year JGB yield fluctuations to half a percentage point on either side of the 0.0% target level in December.)
• The BoJ stated that it is appropriate to continue with monetary easing at this point, although it is necessary to examine this at some point in the future and assess the balance between positive effects and side effects.
• Speculation about a BoJ monetary policy pivot is rife. Japan’s Prime Minister Fumio Kishida said during the week that he would likely nominate the new BoJ governor in February. Incumbent Haruhiko Kuroda’s term ends in April, which many anticipate could mark a turning point in the central bank’s trajectory away from its dovish monetary policy stance, which has left it an outlier as other central banks worldwide have been raising interest rates.
• Activity in the services sector expanded moderately, with the government’s travel subsidy program and relaxation of COVID restrictions providing a tailwind. Conversely, the health of the manufacturing sector deteriorated, as subdued demand weighed on output and new orders.
• Financial markets in mainland China were closed for the Lunar New Year holiday, which started January 21, and will reopen on Monday, January 30.
• China’s domestic activity picked up significantly during the weeklong holiday, fueling optimism about a faster-than-anticipated economic recovery as people enjoyed the break from pandemic restrictions. Approximately 95.9 million trips were taken via road, rail, air, and waterways in the first four days of the holiday, or a daily average of 24 million trips compared with 18.6 million over the 2022 break, according to Ministry of Transport data.
• However, spending by Chinese consumers is expected to remain restrained in the near term as the country recovers from three years of pandemic restrictions. Household bank deposits grew by a record RMB 17.8 trillion in 2022 as the pandemic kept people home, according to China’s central bank. Some analysts have estimated that as little as RMB 1.5 trillion will be spent on consumption, which could keep a lid on the economic recovery.
• Shipping cancellations at China’s largest ports have increased amid weaker overseas demand. Cancellation rates from Asia are estimated to reach 31% over the coming weeks, compared with 23% last year and 16% in 2021. While cancellations around the Lunar New Year are normal, this year’s rate will be “exceptionally elevated” as external demand wanes.
• China’s exports have declined for three consecutive months due to pandemic-related disruptions across the country and softer external demand as many economies have slowed. Although Beijing rolled back pandemic restrictions in December, rising infections continued to disrupt activity.

What to watch this week:

• US, UK, and European monetary policy announcements
• Canadian GDP data
• US employment and ISM PMI data
• Eurozone GDP and inflation data
• Japanese employment and retail sales data
• Global PMIs
• 109 S&P 500 and 14 S&P/TSX companies report earnings

• 

Sources: Bloomberg.com,Yardeni.com, Barron’s.com, Factset.com and Newyorkfed.org

Thank you for checking out our ClearWater Market Commentary for January 27th, 2023. If you would like to receive the ClearWater Commentary at the start of every week, sign-up for our Newsletter.