Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
Headline annual inflation in the euro area dropped to 9.2% in December, the first time it has been in single digits since August. Core inflation remained sticky, however, rising to 5.2%, and above market expectations of 5.0%. This raises a concern as the ECB focuses on core inflation numbers when deciding about upcoming hikes. On the targeted longer-term refinancing operations early repayment programme, January’s repayment of €62.6 billion — close to the market expectations of €65 billion — failed to swing the market. According to the ECB’s minutes, the near-term economic outlook is slowly improving, helped by mild weather in December, reduced gas prices, China reopening and government support. The risk of a deep recession has waned (for now).
UK Market Update
In the UK, annual headline inflation of 10.5% in December was down slightly from 10.7% in November. However, core inflation remained elevated, up 6.3%. Housing data continues to trend downwards, with house prices on track to drop 8.0% this year, according to the Halifax House Price Index. The UK’s labour market report showed average earnings (excluding bonuses) some 6.4% higher in the three months to November than a year earlier. This puts pressure on the BoE for a 50 bps hike in February, as inflation will become harder to tame if pay growth continues at this pace (see Chart of the Month). Meanwhile, the BoE has completely unwound the £19.3 billion in emergency government bonds bought in November to stabilise markets following the infamous ‘mini budget’.
US Market Update
Annual US headline inflation fell to 6.5% in December, with the core component down to 5.7%. While inflation is slowing more quickly than in 2022, additional tightening is required to reach the FOMC target rate. However, a downshift from 50 bps to 25 bps at the FOMC’s February meeting is warranted and supported by futures pricing. GDP grew by an annualised 2.9% in the fourth quarter of 2022, reducing recession fears for many market participants. On 19 January, the US hit its $31.4 trillion borrowing limit and invoked extraordinary measures to fund the government. The onus is now on Congress to act before the ‘X Date’ — the point at which the Treasury exhausts extraordinary measures — or risk an unprecedented government default. We expect elevated financial market volatility until this is resolved.
Looking Ahead
While the market is relatively sure about the policy outcomes from February’s monetary policy meetings — a 25 bps hike from the FOMC and 50 bps apiece from the BoE and ECB — particular attention will be paid to any statements that might indicate a further reduction in the pace of monetary policy tightening and the eventual peak in policy rates. Central bankers and the markets are currently at loggerheads about the future path of monetary policy. Market participants extrapolate that falling headline inflation and a recession will be enough to drag core inflation down to central banks’ inflation targets, allowing rate cuts in 2023. Central bankers have explicitly pushed back against this notion. As highlighted in our previous commentaries, we believe central bankers are far more likely to pause than to cut interest rates during the second half of 2023.
Chart of the Month: Falling Interest Rate Expectations to Play Vital Factor in Central Bank Rate Decisions
Source: Bloomberg. As of 31/01/2023
Sign up to the Liquidity Link Newsletter
Latest News & Insights Across Global Liquidity Markets
Northern Trust Asset Management welcomes you to the full Liquidity Link Newsletter, our monthly publication offering timely updates on the UK, Eurozone and US markets - along with the latest:
- Videos
- Webinars
- Thought leadership (including blogs, articles and case studies)
For Europe and Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
The Northern Trust Company of Hong Kong Limited (TNTCHK) is regulated by the Hong Kong Securities and Futures Commission. In Australia, TNTCHK is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act. TNTCHK is authorized and regulated by the SFC under Hong Kong laws, which differ from Australian laws. In Singapore, The Northern Trust Company of Hong Kong Limited (TNTCHK), Northern Trust Global Investments Limited (NTGIL), and Northern Trust Investments, Inc. are exempt from the requirement to hold a Financial Adviser’s Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of certain financial advisory services and fund management activities.
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc. (NTI), Northern Trust Global Investments Limited (NTGIL), Northern Trust Fund Managers (Ireland) Limited (NTFMIL), Northern Trust Global Investments Japan, K.K. (NTKK), NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd and investment personnel of The Northern Trust Company of Hong Kong Limited (TNTCHK) and The Northern Trust Company (TNTC). ).© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
