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SPI Management Newsletter 13.01.2023

U.S. inflation decreased in December for the sixth consecutive month

Following a peak in mid-2022, U.S. inflation dropped in December for the sixth consecutive month as the Federal Reserve rapidly hiked interest rates and the economy showed signs of slowing.

The consumer-price index, which tracks how much people spend for goods and services, increased 6.5% from a year earlier in December, down from 7.1% in November and far less than its peak of 9.1% in June.

After increasing 6% in November, the core CPI, which excludes volatile energy and food prices, increased 5.7% in December. Increases in core CPI are frequently considered to be a more reliable indicator of future inflation than changes in the CPI as a whole.

The figures strengthened indications that, after a spike last year, inflation is turning the corner. Additionally, they are likely to keep the Fed on track to lower interest rate rises from a half-percentage point increase in December to a quarter-percentage point increase at their meeting that ends on February 1.

On Thursday, U.S. stocks rose and investors purchased U.S. Treasury bonds, driving up bond prices and lowering rates. While the Dow Jones Industrial Average rose 217 points or 0.6%, the S&P 500 increased by 0.3%. The heavily tech-focused Nasdaq Composite also increased by 0.6%.

Inflation is decreasing as a result of various indications that the US economy would slow down in late 2022. In November compared to October, the United States' imports and exports decreased, while retail sales, manufacturing production, and house sales were also down. Even though the labor market remained tight and initial unemployment insurance claims were historically low, job and pay growth stalled in December.

European stocks shine as China re-opens and oil prices decline

Since bottoming out in late September, the benchmark Stoxx Europe 600 index has increased by 18%, outpacing the 9.4% increase in the blue-chip S&P 500 index on Wall Street during the same time period.

Natural gas prices dropped from their late-August peak, lowering eurozone inflation and relieving pressure on the European Central Bank to continue rising interest rates in massive 0.75 percentage point chunks, which helped to propel European stocks higher throughout the fourth quarter of 2022.

A additional benefit was the relaxation of rigorous zero-Covid regulations in China, which is Europe's largest trade partner. This helped elevate luxury goods companies whose sales are heavily dependent on Chinese demand.

There will no longer be a "technical recession" in Europe this year, according to Goldman Sachs analysts, who now predict that the GDP will expand by 0.6% in 2023 rather than contract by 0.1%.

The US Citi bank recently raised the Stoxx 600 to overweight, and Citi analysts now predict "the mildest earnings recession [in Europe] since 1970" and a gain of about 9% in the index until the end of the year. Over the same time span, the S&P 500 is anticipated to increase by less than half as much.

Additionally, European stocks are not too expensive. According to Citi's analysis, the sharp market decline last year caused equities listed on the MSCI Europe to trade at a 12-month forward price to earnings multiple of about 12 times, which is below their long-term average and represents the largest discount to US equities in 30 years. As Europe's economy weakens and corporate earnings estimates start to be revised downward, history suggests that is positive for stocks.

Adapted from WSJ, CNBC, FT, Bloomberg, NYT

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