Rising core inflation causes unrest

After the strong start to the year in January 2023, the global markets largely moved sideways overall in February. In particular, rising core inflation excluding the components of energy and food worried the stock markets because this also raised interest rate expectations again.

February was a rather weak month for the international stock markets. In contrast, most European stock markets performed well. The German stock index DAX ended the month up 1.57% and the broad European index Stoxx Europe 600 advanced 1.74%. In the US, the S&P 500 lost -0.23% and Hong Kong's Hang Seng Index came under more pressure, losing -7.33%. Global equities declined -0.15% as measured by the MSCI World Index - all index data in euro terms.

At the beginning of the month, confidence was high that equity markets could continue the recovery from January in February. Initially, central banks raised key interest rates as expected: the US Federal Reserve (Fed) by a moderate 25 basis points to a range of 4.50% to 4.75% on 1 February and the European Central Bank (ECB) by 50 basis points to 3.0% on 2 February. Then, however, robust labour market data in the USA reawakened concerns in the markets that inflation might turn out to be more stubborn and that the Fed might therefore raise key rates faster or more sharply than hoped after all. This concern was confirmed by upwardly revised data on core inflation in the US for the fourth quarter of 2022. Inflation data for January showed a similar picture, with headline inflation down slightly to 6.4% from 6.5% in December, but core inflation (excluding energy and food) up from 5.2% to 5.6%.

The Fed then said that the central bank would remain flexible to adjust to economic developments and that interest rates could also rise for longer than expected, without quantifying a specific interest rate level. This clouded market sentiment and investors speculated on a scenario in which both growth and inflation would be high and the Fed would have to raise rates even further to control inflation. As a result, the majority of interest rate expectations in the US for the end of this rate hike cycle rose to a range of 5.25% to 5.50%, but some already expect US policy rates to be as high as 6.0%. The development of inflation was not limited to the USA: In the euro area, headline inflation fell slightly from 8.6% to 8.5% due to declining energy prices, but core inflation rose from 5.3% to 5.6%, supported in part by a robust labour market.

In Germany, business sentiment continued to improve, as measured by the ifo Business Climate Index, which rose to 91.1 points in February (January: 90.1). The reasons for this were falling energy prices, the end of the Corona measures in China and growing confidence, especially in the Travel & Leisure sector. However, the index is still well below the February 2020 level (96.1) before the Corona cut.

Most Asian equity markets were under pressure in February. One reason for this is likely to be China's cautious growth target of around 5.0% for 2023 (another the significantly appreciating US dollar), with priority given to boosting domestic demand. Some economists now expect growth momentum in the Middle Kingdom to slow in the medium term. On the other hand, a less ambitious target reduces pressure and allows the government not to subordinate everything to growth, but to pursue other goals such as financial stability. In the short term, the dropped Corona measures are having a positive effect, recognisable among other things by the fact that the population is becoming more mobile again, which should be good for the economy. In February, the Caixin Purchasing Managers' Index for the manufacturing sector rose by 2.4 points to 51.6, above the 50 level, indicating an expanding economy. New orders (+3.2%) and exports (+6.3%) also increased significantly.

Bond markets fell across the board in the face of increased interest rate expectations. The yield on 10-year German Bunds rose from 2.29% to 2.65% and that of their US counterparts from 3.51% to 3.92%. The gold price was unable to continue the upward trend of recent months in February and fell by about -5.3% to USD 1,826.9 per troy ounce.

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