Global equities extend gains in February, as investors now expect the US and even Europe to avoid a recession
US yield curve shifts higher and US dollar rises on prospect of stronger economy and continued policy tightening
Latest US data show that prices in the services sector continue to rise, keeping prospect of hawkish surprises alive
Chinese equities retreat after a three-month rally, as geopolitical tensions and domestic policy concerns return
Financial markets remained buoyant over the past month, with equities and interest rates rising, and the US dollar strengthening again against most peers. Energy prices continued to fall, while most industrial metal prices trended lower as well.
Backing this global trend was China, where stocks shed about a quarter of the gains they had registered during their strong reopening rebound over the previous three months. In fact, European and Japanese equities began to show relative strength in recent weeks, along with cyclical sectors as well as private equity-related strategies and small caps. Europe benefited from the reopening of China, which should support its exports, while Japanese stocks were supported by a weaker yen.
Bonds were sold off, in particular at the longer end, leading to an upward shift of as much as 50 basis points of the US yield curve – with slightly reduced inversion. These developments reflect that many investors now anticipate the US and even Europe to avoid a recession this year, helped by diverse factors such as China’s sudden reopening in January. They also expect the Federal Reserve to stop raising interest rates later this year.
Indeed, the International Monetary Fund’s (IMF) January Update of its 2023 World Economic Outlook confirmed these improved expectations by upgrading its forecasts for this year. The IMF now projects the global economy to grow 2.9% in 2023 and then accelerate to 3.1% in 2024.
The 2023 forecast is below the historical average of 3.8%, but 0.2 percentage point higher than the IMF projected in October. While rising interest rates and the war in Ukraine continue to weigh on economic activity, China’s recent reopening has paved the way for a faster-than-expected recovery, the IMF said. Global inflation, meanhwile, is expected to fall to 6.6% in 2023 and 4.3% in 2024, still above pre-pandemic levels. In the developed economies, inflation is expected to fall from 7.3% in 2022 to 4.6% this year and 2.6% next year.
This brightening up of expectations also became visible in the consensus forecasts for 2023. On average, economists now expect the eurozone to narrowly avoid a recession this year, while growth in the US, China, and Japan is expected to increase at a higher level. Among large economies, only the UK is expected to remain in a relatively deep recession.
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