Market Flash Report | February 2023

Economic Highlights

United States
  • Markets were laser focused on the January CPI report that showed inflation had risen 0.5% M/M or 6.4% Y/Y. Core CPI increased 0.4% and 5.6% over the past year. Rising shelter costs accounted for about half the monthly increase. They rose 0.7% in January while energy jumped 2% and food costs increased 0.5%. “Super core” services inflation, which excludes food, energy and shelter, rose 0.2% M/M and 4% Y/Y. Inflation is trending down, but it remains sticky and this report likely keeps the Federal Reserve in play for a few more months. The Fed raised rates by another 25 bps at its February 1 meeting, but this report has resulted in a backup in Treasury yields and a convergence of market and Fed expectations.
  • The January employment report smashed expectations with 517,000 new jobs created and the unemployment rate falling to 3.4%, the lowest level since May 1969. Estimates were for 187,000 new jobs and an unemployment rate of 3.6%. More workers entered the labor force last month with the labor participation rate edging up to 62.4%, and the broader U6 measure of unemployment was 6.6%. Wages also posted solid gains for the month. Average hourly earnings increased 0.3%, in line with the estimate, and 4.4% Y/Y, 0.1% higher than expectations, though a bit below the December gain of 4.6%.
  • January’s durable goods orders report was mixed with a headline decline of 4.5%, but a gain of 0.8% when excluding the volatile commercial aircraft sector. Shipments of “core” non-defense capital goods ex-aircraft (a key input for business investment in the calculation of GDP), rose 1.1% in January following declines in the last two months of 2022. While orders are still rising, they are actually shrinking when adjusted for inflation.
  • Retail sales jumped 3% in January, smashing expectations. Retail sales have surged 6.4% Y/Y, in-line with the pace of inflation.
Non-U.S. Developed
  • Eurozone business activity growth accelerated to a nine-month high in February, reflecting an improved performance of the service sector and a return to growth of manufacturing output. The eurozone flash composite PMI rose from 50.3 in January to 52.3 in February. Eurozone services activity hit an 8-month high of 53.0, eurozone manufacturing output hit a 9-month high of 50.4, but the official eurozone manufacturing PMI fell to a 2-month low of 48.5. Business activity across the eurozone grew much faster than expected in February, thanks to resurgent service sector activity and a recovering manufacturing economy. February’s PMI is broadly consistent with GDP, rising at a quarterly rate of just under 0.3%.
  • The Japanese economy advanced 0.6% on an annualized basis during the fourth quarter of 2022, below the market consensus of 2% growth and after a revised 1.0% contraction in the previous period. Private consumption increased 0.5% with the removal of some COVID-19 restrictions and government spending surged at a faster pace in Q4 than the previous quarter. On the negative end was a contraction (-0.5%) in business spending for the first time in three quarters. Like nearly everywhere else across the globe, rising inflation has been a growing issue in Japan. Private consumption did rebound in Q4, but the outlook will be key for how the BOJ implements potential future monetary policy changes.
Emerging Markets
  • China’s manufacturing sector hit its highest level of activity since April 2012. The official manufacturing PMI rose to 52.6 in February from 50.1 reported in January. China’s non-manufacturing PMI also grew further in February to 56.3 from January’s print of 54.4, when it saw a sharp improvement backed by a recovery in services and construction activity. The broad-based improvements for both manufacturing and non-manufacturing PMIs in February reflect the solid momentum of post-reopening recovery.
  • Although Moody’s expects GDP growth in China to decline over the medium-term, it did raise its growth outlook for 2023 and 2024 from 4% to 5%. It expects support from domestic consumption to fuel the better-than-expected economic growth.
  • India’s Q4 GDP report showed growth of 4.4%, below the 5.2% reading from Q4 2021. Manufacturing and service sector data remain solid across the country and the government still maintains its 7% GDP growth estimate for its fiscal year ending March 31, 2023.

Market Performance (as of 02/28/23)

Market Performance Chart

Fixed Income
  • After collapsing in January, yields moved higher in February on the back of hotter inflation data.
  • Core fixed income and municipal bonds lost ground in February.
  • Credit showed some resilience last month with modest losses in IG/HY and small gains in floating rate loans.
  • Bonds outside the U.S. were hit hard by the combination of rising rates and a rebound in the U.S. dollar.
U.S. Equities
  • U.S. equities fell across the board in February led by weakness in value.
  • Across the market cap spectrum, growth beat value for the second consecutive month.
  • Small caps provided relative outperformance compared to large caps.
Non-U.S. Equities
  • Non-U.S. equities exhibited weakness last month, with significant losses in emerging markets.
  • Unlike what occurred in the U.S., growth lagged value and small caps trailed large caps.
  • EMs fell over 6 % led by losses in Asia/China and Latin America.
  • The strong USD cost investors 271 bps in the EAFE Index and 183 bps in the EM Index.
S&P 500 (as of February 28, 2023)

S& P 500 Performance Chart

Russell 2000 (as of February 28, 2023)

Russell 2000 Performance chart

MSCI EAFE (as of February 28, 2023)

MSCI EAFE Performance Chart

MSCI EM (as of February 28, 2023)

MSCI EM Performance Chart