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Financial markets were in a very good mood in January. The mix of flat economic data, the surprising "reopening" of the Chinese economy, and market participants' expectations that the U.S. Federal Reserve would soon end its aggressive stance provided a boost. U.S. economic growth proved surprisingly strong, at least on the surface. However, private consumption, the most important driver of US growth, was not as strong as expected. Housing also weakened for the second quarter in a row, and the labor market posted its lowest job growth (at a high level) in two years in December. According to economists, these developments point to an increased risk of recession. Average wage growth slowed further, supporting hopes that the FED will have to impose fewer rate hikes this year. The Bank of Canada (BoC) was one of the first central banks this year to apparently pause its rate hike cycle after the January hike. The monetary policies of the U.S. and Canadians are closely intertwined, so the Fed is likely to follow the same path by summer at the latest, in order to be able to assess the effect of the tighter monetary policy over time first. The pause by the Canadians is tied to the expectation that inflation will fall back to 3% by mid-year. The risk of a wage-price spiral is said to be contained now, and there are signs that rate hikes are slowing growth. The FED, on the other hand, will need to continue to calibrate market expectations of rate cuts this year as well as loose financial conditions - the latter quoted back at June 2022 levels, a circumstance that could prompt the FED to keep the policy rate high for longer in order to tie market expectations closer to the path of communicated monetary policy and keep price developments in check. Too loose financing conditions are a thorn in the side of the central bank when it comes to credibility in the fight against still high inflation. In addition, China's "reopening" is likely to temporarily increase price pressure globally (see Focus). The FED thus has a difficult dilemma to solve: if it eases monetary policy too early, it risks second-round effects; if the FED remains restrictive, this will exacerbate the already feared recession. Getting inflation right is the top priority for monetary watchdogs - Fed Chairman Jerome Powell's preferred barometer, core PCE inflation without a rental component, has so far shown less disinflationary momentum than the CPI data that the market pays much attention to. The central bank is therefore unlikely to already go the way of the Canadians in February and reiterate that interest rates will remain higher for longer and that inflation is still too high.

Equity Markets

Thanks to the opening of the Chinese economy, the European stock exchanges experienced one of the best starts to the year ever. The Swiss SMI gained 5%. In the USA, the winners were for once mainly to be found in the technology segment. The Nasdaq 100 gained more than 10%. By contrast, the index lost a good 9% in December 2022. Since the beginning of the year, more than 100,000 job cuts have already been announced in the US technology sector to reduce the overcapacities since the pandemic - this trend is likely to continue. European equities already showed relative strength to the US market on hopes of covid easing in China in December. In terms of sectors, stocks from the cyclical consumer, technology, communications basic materials and real estate led the winners list.

Interest Rates

Bond yields fell again slightly in January. The structure of the US yield curve is more negative this year. The difference between 3-month and 10-year yields reached -130 basis points at times and has already been pointing to an impending recession since October. The relative attractiveness of bonds versus equities has increased further - especially in the USA, the difference between the "risk-free" yield on government bonds and the earnings yield on equities is as low as it was last before the financial crisis (a meager 1% depending on maturity).

Currencies & Commodities

Commodity prices also clearly showed the reversal in China's zero-covid policy. Cyclically sensitive metals such as copper, nickel, iron ore and aluminum rose sharply. The price of oil, on the other hand, fell by 3%. The price of gas corrected due to mild temperatures (depending on the exchange and contract) even up to a steep 40%. The Australian dollar was the biggest winner in January - because of the high dependence on the Chinese economy, it gained almost 2% against the Swiss franc. The EUR climbed back above parity against the franc at the start of the year.


While the opening of the Chinese economy is positive for global growth expectations in the medium term, it complicates the task of central banks in Europe and the U.S., which can still call the fight against inflation a success. The significantly higher inflation figures for Spain published at the end of January show how difficult it is to make a forecast. It should also be noted that even a pause in the key interest rate with a simultaneous inverse interest rate structure in the USA has not historically led to rising prices. If one also takes into account that the Chinese economy is still plagued by strong overcapacities in the real estate market and a rapidly aging population in the medium term, the medium term outlook appears to be a lot more complex than currently implied by the stock markets. The January rally marks the third rally in the current bear market cycle since 2022 and tempts even skeptics to believe in a simple "passing of the baton" from inflation to disinflation and minimal real economic complications. This continues to seem rather unrealistic given the history. We therefore maintain our cautious bias for now. Selectively, we would prefer cheaper valued equities outside the US in the first instance in the event of renewed weakness.  


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