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Market Update February 2023

Markets pause as inflation remains sticky

  • FTSE 100 reaches new all-time high and surpasses 8,000 for first time.

  • Global equity markets slide late month as inflation remains persistently high.

  • The Bank of England increase base rate by a further 0.50%. The US Federal Reserve only hike their key borrowing rate by 0.25%.

  • February 24th marks the one-year anniversary of Russia's invasion of Ukraine. Anti-war protests occur in Russia and around the world.

  • More than 500,000 workers across multiple public sectors go on strike in the United Kingdom, amid disputes over pay and working conditions. It is the largest industrial action in the UK since 2010.

  • A 7.8-magnitiude earthquake strikes southern Turkey, the largest in the country since 1939.

  • Nicola Sturgeon announces that she is resigning as First Minister of Scotland and Leader of the Scottish National Party.

  • Supermarkets in the United Kingdom, such as Asda and Morrisons, begin rationing fruit and vegetables as food crisis continues.

The strong start to the year enjoyed by equity markets petered out somewhat in the second half of February as investors reacted negatively to broadly good economic news. Better than expected growth data, robust employment and confident management surveys would suggest a healthier than expected global economy. The only slight wrinkle is that central banks may well perceive this as inflationary and therefore view that further work is required to raise interest rates to combat these inflationary pressures.


Investors appear to remain concerned that interest rates will remain higher for longer as inflation pressures persist. The US Federal Reserve’s (Fed) preferred inflation index, the personal-consumption-expenditures price index, unexpectedly rose 5.4% in January. Also, minutes from the Fed’s January meeting indicated that there are signs that inflation is coming down, but not enough to counter the need for more interest rate increases. We also had stronger than expected inflation readings for several of the largest European nations during the month.


During February, Bank of England governor Andrew Bailey spoke again about how the bank expects UK inflation to fall to 4% by the end of the year and he focused on this fact when asking public sector worker pay deals to be mindful of this. This echoed the bank’s own policy whereby it has agreed to offer its own staff a 3.5% pay rise with a one off top up of 1%. He also spoke at length about his concerns over higher private sector wage setting in the UK and its negative impact on fighting inflation.


New data suggests the global economy isn’t cooling as much as many expected, with business activity in the US, the eurozone and the UK picking up in February. Unemployment also remains at historical lows. During the month the so called ‘terminal rate’ which is the market implied expectation of when the Fed will stop hiking rates, increased from below 5% to above 5.4%, driven by the strong economic data and sticky inflation.


Data released during the month that the UK has narrowly avoided a technical recession for now – ending up flat over the third and fourth quarters of 2022. The chancellor Jeremy Hunt quickly declared that this showed the UK economy was more resilient than many expected, but December 2022 was still a weaker month than predicted, partly due to a striking workforce and a break in Premier League football for the world cup.


This is promising news, although we remain mindful that the UK economy is still 0.8% below the same period in 2019. In contrast the US economy is 5.1% higher and even the Eurozone has grown by 2.4%, despite all the issues experienced in 2022. The Bank of England has stated that it expects the UK economy to contract in 2023 and in the first quarter of 2024 as inflation remains much higher than in the last twenty years and higher interest rates weigh on public spending. For now though, as in most of 2022, the UK economy seems to be holding on stubbornly.


The MSCI World Equity Index ended the month down 0.8%, with UK equities outperforming. The FTSE 100 Index rose 1.8%. Expectations of further rate hikes caused bond yields to jump higher (hurting bond prices), especially the yield on shorter dated bonds. This caused the bond yield curve to become further inverted, which is a relatively unusual situation where bonds that mature in the near-term yield more than bonds with a longer time to maturity. Technology stock prices were hit hard in 2022, with most market commentators attributing this to higher yields, but their recovery in 2023 continued (albeit at a slower pace) in February despite yields rising. The technology-heavy Nasdaq 100 Index rose 1.3% in Sterling terms. During the month, Tech giant Meta Platforms (owner of Facebook) announced a massive $40 billion share repurchase program representing around 10% of its market cap. This continues the recent trend of stocks in the tech sector buying back large amounts of their own shares.


The US Dollar enjoyed a strong month on expectations of their interest rates moving higher and for longer. The dollar rose 1.7% compared to Sterling. This created a headwind for commodity prices, with gold slipping 5.3%. One commodity that bucked the trend in February was Orange Juice, as poor weather conditions and citrus disease in key production regions caused OJ futures prices to rise over 15%.


The strong dollar likely contributed to the recent rally for emerging market stocks running out of steam in February. According to China’s National Bureau of Statistics, the official manufacturing sector purchasing managers’ index was 52.6 last month, up from January’s 50.1 and higher than economists’ expectations of 50.5. The reading was at its highest level since April 2012. A figure of more than 50 on the index, which surveys companies about their activity, indicates an expansion, while one below signals a contraction. The data is an indication of recovery across China’s economy, which grew just 3% last year under President Xi Jinping’s zero-Covid policy and a wave of infections in big cities. Beijing’s decision to abruptly unravel the restrictions has spurred a resumption of activity.


Despite monetary policy generally becoming more tighter, 2023 has already shown that if the central bank narrative remains firm, but ultimately of a dovish nature, then markets can continue to make up for the lost ground of 2022.


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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.


It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.


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