Economic data releases in February painted a picture of a relentlessly strong US labour market and equally persistent inflationary pressures. January inflation figures for both producers and consumers exceeded analysts' estimates in the US and an impressive labour market report caused bond markets to give up all of their year-to-date gains. As recently as January this year, market pricing did not give credence to the Fed's "Higher for Longer" rate message. However, the persistently solid data led to a repricing of interest rate expectations in the USA - with the new circumstances, investors see the US key interest rate rising to 5.5%, from 5% previously. Market participants reversed the prevailing expectations in January. Signs of easing inflation and moderate economic data led to the assumption that rate hikes would soon end. Our expectation that Chinese reopening would have a negative impact on Western inflationary pressures currently seems to be confirming. Price pressures also remain present in Europe, with market participants expecting further rate hikes from the ECB of an additional 140 basis points. The market thus continues to be tempted to find its way between the various guiding narratives of "soft landing" (only mild recession), " no landing" (no recession) or "hard landing" (hard recession). The notion of " soft or no landing", which has so far continued to dominate, boosted equity valuations in January and to a limited extent in February. However, uncertainty has risen again following recent solid economic data and prevailing inflationary pressures, keeping central banks and investors alike on their toes. Unemployment is at a 70-year low and the Fed's preferred measure of inflation is still twice the target. At the same time, revisions to price trends show that inflation remains stubborn.
In February, a mixed picture prevailed at the level of the indices. The US stock market and the Asian stock exchanges suffered significant losses and European shares once again gained. The Chinese markets lost significantly - the Hang Seng, for example, completely gave up the gains it had made since the beginning of the year. The Swiss stock market was treading water. The US stock market, which represents just over 65% of total world equity capitalisation, is not cheaply valued even after last year's correction. No matter how you spin it, even though the price-earnings ratio has fallen, it is merely back to the long-term mean. The popular Shiller P/E ratio as a long-term valuation measure is also lower, but remains historically high at the 90% percentile. A similarly expensive valuation level is shown by the price/sales ratio or Warren Buffett's famous market capitalisation/GDP. Despite the correction, these valuation approaches remain at high levels by historical standards. The equity risk premium, expressed as the difference between the equity earnings yield and the risk-free interest rate, also remains at multi-year lows and hardly offers a significant premium in view of the recession and inflation risks (see Focus).
2-year US interest rates rose to a new high on the back of robust economic and inflation figures. Due to the surprisingly persistent inflationary tendencies, larger bets were observed, which bet on a rise in the US key interest rate to 6% by September. With the data gradually released in February, this bet seemed increasingly unspectacular. Yields on 10-year German Bunds marked a new interim high after the latest inflation figures.
Fluctuations in commodities were tame. After the high losses in the gas price, a stabilisation took place recently. Various factors such as the unusually mild weather but also the failure of an important LNG terminal in Texas increased the downward pressure on US liquefied natural gas considerably in the previous months. These factors should now dissipate and stabilise the price. The oil price gained almost 2.5% and the USD rose again due to uncertainties about inflationary pressures and the Fed's future monetary policy.
Valuations, as mentioned in the introduction, leave little room for undesirable developments in the financial market. At present, investors are confident that the US Federal Reserve will be able to prevent a sharp growth slump. Meanwhile, the recent idea of "no landing" almost appears ironic, as such a move would per se provoke an even more restrictive monetary policy, which would ultimately lead to a more or less pronounced dip in growth. We already mentioned in our last commentary that a simple "passing of the baton" from inflation to disinflation and minimal real economic complications is hardly realistic. For now, equities at the given valuation within the described growth scenarios dignify a rather positive outcome. It is quite possible that this market mantra could continue for a while. Moreover, investor sentiment, which has recently deteriorated significantly again, does not currently suggest an immediate disappointment. Given the economic momentum, 2023 could avert a recession - but accompanied by higher inflation than expected just a few weeks ago. Such a scenario would put the Fed in a difficult situation in 2024 at the latest. In the medium term, we continue to position ourselves with healthy caution in view of the factors mentioned.