US stocks closed out a second positive week in a row after the CPI fell by a seasonally adjusted 0.1% between November and December. Yet prices were still 6.5% higher than the prior year even if energy prices plunged 4.5% month over month. 

Hopes of a less hawkish monetary policy stance by the Federal Reserve pushed the major indexes higher. The tech-heavy Nasdaq and the benchmark S&P 500 notched their best week since mid-November, with gains of 4.82% and 2.67% respectively. Same trend in Europe with the MSCI EMU up 2.89% and the FTSE 100 up 1.88%, though growth in many European economies is slowing.

In Asia, the Shanghai Composite gained 1.19%, helped by increased optimism over an economic recovery in China. Japan’s Nikkei snapped its four-week losing streak edging up 0.56%. 

Growth stocks spearhead gains in positive start to 2023   

In the wake of last week’s rally, growth stocks shined again on bets of a slower pace of interest rate hikes by the Fed. Among the 11 principal sectors of the S&P 500, it is striking to see the massive performance divergence between consumer discretionary and consumer staples. The later, a defensive sector in an economic downturn, lost 1.46% week-over-week while consumer discretionary stocks rose 5.76%, boosted by Amazon (AMZN) and Tesla (TSLA). Amazon stocks climbed with a near 14% gain after Jefferies said they saw cost pressures easing for the e-commerce giant in H2 2023. Tesla stocks gained 8.26% as the EV maker disclosed longer waiting times for some models in China, signalling the recent price cuts could stoke demand.

Big tech was also pushed to the top of the major S&P 500 sector list (information technology up 4.60%) as U.S. Treasury yields declined. Microsoft stocks (MSFT) was trading significantly higher (+6.36% for the week). Communication services were not far behind (+4.07%), helped by Meta Platforms (META) and Alphabet-Google (GOOG) up 5.35% and 5.26% respectively.

Bond markets rally on signs of cooling inflation     

The bond rally showed no sign of waning in the second week of 2023. Indeed, the yield on the benchmark 10-Year U.S. Treasury Note fell 6 basis points from 3.56% to 3.50%. The yield curve is deeply inverted with the spread between the 2-year and 10-year yields at -73 basis points. Investors who trade in the Fed funds futures market now expect the central bank to stop hiking with a terminal rate slightly below 5% (4.90% in June). The Fed’s balance sheet has shrunk by $43bn since the beginning of the year.

In Europe, the yield on the German 10-year Bund slid 4 basis points to 2.17%. The French 10-year OAT yield was down 10 basis points from 2.72% to 2.62% while the UK 10-year Gilt lost 11 basis points from 3.48% to 3.37%.

Prices on corporate bonds continued to rise as anticipated last week. Investment grade corporate bond prices were up +0.62% in Europe (IBOXX € Liquid Corporates index) and up +1.80% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index). High-yield bonds gained +1.38% in Europe (IBOXX € Liquid High Yield Index) and +1.37% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Lastly, emerging debt in local currencies jumped 3.22%, benefitting from a weak dollar, while gold closed at its highest levels since April at $1,922/Oz.

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