Is the global economic recovery slowing down?
On the latest edition of Market Week in Review, Equity Portfolio Manager Olga Bezrokov and Head of AIS Portfolio & Business Consulting, Sophie Antal-Gilbert, discussed recently released economic data from around the globe. They also chatted about the growth outlook for China and reviewed early results from fourth-quarter earnings season.
Across the globe, inflation runs hot while consumer spending dips
The week of 17 January was marked by a slew of global economic data releases, Bezrokov said, including a report showing a rise in weekly U.S. jobless claims. She explained that while the 286,000 new unemployment filings for the week ending 15 January were notably higher than consensus expectations, some of the uptick was almost certainly due to seasonal adjustments. The surge in COVID-19 cases caused by the omicron variant was probably also somewhat responsible for the increase, Bezrokov added.
Meanwhile, two separate surveys offered conflicting signals on the state of U.S. manufacturing, she said, with the New York Fed's Empire State Manufacturing Index badly missing expectations, while the Philadelphia Fed's Manufacturing Index surprised to the upside.
Beyond the U.S., the release of new data on inflation and retail sales also broadly pointed to an environment of high inflation and modest consumer pullback, Bezrokov said, noting that UK retail sales plunged by 3.7% in December. "In developed countries around the world, inflation is continuing to run red-hot, but it's important to understand that this acceleration has been largely anticipated," she stated, noting that her expectation is for pricing pressures to begin easing in the coming months. As for the drop in consumer spending, Bezrokov said that the rapid spread of the omicron variant is likely also to blame.
Overall, though, she stressed that in the wake of 2021's powerful economic recovery, it's very normal to see some deceleration in this year's numbers. "We're still expecting above-trend growth for 2022, but it's only natural to see a slowdown relative to the very strong numbers we saw in 2021," Bezrokov explained.
PBOC lowers key rates, signals policy easing
Shifting gears to China, Bezrokov said that despite a disappointing December retail sales report and other weak data releases, the outlook for the country moving forward may brighten, thanks to recently announced easing measures by the People's Bank of China (PBOC).
"On 20 January, the PBOC announced cuts to both the one-year and five-year loan prime rates. While the magnitude of these changes may seem small - for instance, the five-year loan prime rate, which impacts mortgage rates, was lowered to 4.60% from 4.65% - directionally, these cuts are extremely important, because they demonstrate the central bank's commitment to stabilising credit growth and turning China's economy around," she stated.
Bezrokov said that the recent dovish rhetoric from the PBOC suggests the central bank is embarking on a path of policy easing, which means that China's credit impulse may start recovering later this year. "I still think we're likely to see plenty of soft data over the next couple months, but in my opinion, these recent steps by the PBOC are helping make the second half of 2022 look increasingly positive for China," she remarked.
How are markets reacting to Q4 earnings season?
Turning to U.S. fourth-quarter earnings, Bezrokov noted that it's still very early in the reporting season, with only 64 S&P 500 companies having reported results so far. Of these, 50 have beat expectations, she said. "Broadly speaking, there's been some modest deceleration in the number of companies beating expectations when compared to the very strong performance from previous quarters - with some deceleration in revenue and earnings growth as well," Bezrokov observed.
She stressed that, similar to the cooldown in global economic data, the deceleration is very natural and frankly unsurprising, coming in the wake of last year's exceptional earnings seasons. However, markets are clearly reacting to the results with less patience than before, Bezrokov said. "The companies that are missing expectations - either on earnings or on guidance - are being punished by markets, which is adding to some of the weakness in equities we've seen lately," she noted. As an example, Bezrokov pointed to Netflix, which saw its stock plunge over 20% on 21 January after it warned of an anticipated slowdown in subscriber growth.
She noted that the recent selloffs in the market haven't been indiscriminate, with companies that have delivered stronger-than-expected earnings faring significantly better than those that haven't. "To me, this suggests that fundamentals are starting to matter more again for stock performance - and I believe this could lead to a favourable environment for active managers," Bezrokov concluded.