Wall Street got a boost after a better-than-expected GDP report. Economic growth slowed in the last quarter, compared with Q3, giving greater credence to the Fed’s wish to engineer a soft landing. Yet, it still grew at a 2.9% annual rate (vs. 3.2% from July to September) despite widespread fears of a looming recession and Fed’s rate hikes. The U.S. central bank raised its benchmark rate seven times last year. Recent data, including a 1.1% drop in retail sales last month, suggests that the pace of expansion is likely to further slow in the coming months. Traders now wager that the Fed will soon tone down its hawkish rhetoric. 

This positive mood pushed stock indexes higher. The S&P 500 rose 2.47% week-over-week. The Dow Jones Industrial Average was up 1.81%, or 602.59 points. The Nasdaq Composite jumped 4.32%, notching its fourth consecutive weekly gain. The tech-heavy index is up 11.04% for the month.

In Europe, the MSCI EMU gained 1.46% but the FTSE 100 was flat (-0.07%). In Asia, the Nikkei rose 3.12% while the Hang Seng added 2.92% (up 14.70% over the last four weeks). The end of the rigid Covid rules in China and the re-opening of its borders have further boosted investor sentiment.

Growth stocks’ comeback   

The more growth-oriented sectors faced the biggest pressure from rising interest rates last year. In January, battered growth stocks are showing signs of recovery in the hope that the Fed could downshift the pace of rate hikes. 

Consumer discretionary was the best sector this week (+6.38%), boosted by Tesla (TSLA, up 33.34%). The EV maker reported record profits for the fourth quarter and the full year, but tighter profit margins. Recent price cuts may have fuelled demand for its products. Tech stocks got a lift (+4.07%) from Apple (AAPL, up 5.85%). Meta Platforms (META, up 8.88%) led the run-up in communication services (+3.28%).

Defensive sectors lagged again. Health care lost 0.89%, extending its losing streak to five weeks. This sector suffered from notable outflows this week (almost $2bn with healthcare ETFs). Utilities edged down 0.49% while consumer staples managed to edge up 0.43%. All those defensive sectors are set to end the month in negative territory. 

Bond markets remain calm      

The U.S. GDP increased at an annual rate of 2.9% in Q4 2022, lower than the previous quarter but above the consensus estimate of 2.6%. Yields on U.S. Treasuries slightly increased along the curve following the report. 

The benchmark 10- year T-note yield edged up 3 bps to 3.51% while the 2-year yield gained 1 basis point from 4.19% to 4.20%. Over the last four weeks, the Federal Reserve has been letting $81 billion worth of assets roll off its balance sheet, reducing the money supply and the availability of credit in the financial system. That might prompt businesses to delay any new investments, including hiring. For the record, the U.S. central bank has already allowed its balance sheet to shrink by $500 billion from the peak observed in mid-April 2022, to $8.47 trillion.

In Europe, the yield on the German 10-year Bund rose 6 basis points to 2.24% while the French OAT yield with the same maturity closed at 2.71% (up 10 basis points). In Japan, the BOJ's dogged defense of yield curve control seems to be working with 10-year yields holding below the 0.50% ceiling (up 8 basis points at 0.485%).

Corporate bonds were mixed. Investment grade corporate bond prices were down 0.15% in Europe (IBOXX € Liquid Corporates index) and up 0.24% in the U.S. (IBOXX iShares $ Investment Grade Corporate Bond Index). High-yield bonds notched a fourth week of gains in Europe (IBOXX € Liquid High Yield Index up +0.22%). They added 0.29% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Emerging debt in local currencies turned positive with a gain of 0.61% as the greenback continued to weaken against most currencies. 

Gold prices were little changed at $1,929.40/Oz (+0.06%). The yellow metal reached its highest level since April. 

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