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Following a robust start to the year for markets in January, mixed economic data prints released over February curbed investors’ hopes of a quick reversal in the global monetary tightening cycle, pushing both equity and bond markets lower. Developed market equites (MSCI World) fell -2.4% m/m while emerging market equities (MSCI EM) plunged -6.5% m/m after geopolitical tensions and risk off sentiment drove profit taking. Global bonds (Barclays Global Aggregate) sold off -3.3% m/m, with the yield on the benchmark 10-year U.S. Treasury note nearing 4.00% for the first time since mid-November.

Investors were forced to reassess their expectations for both the peak in interest rates and the ensuing pace of rate cuts due to persistent inflation and growth surprises; meaning that the journey back to target inflation in the U.S. and other developed markets may take longer than previously anticipated. The prospect of less monetary easing in the near term consequently dampened investor sentiment. Diving into equities, growth stocks (MSCI World Growth -1.8%) outperformed value (MSCI World Value -2.9%). In the U.S., 78% of stocks in the S&P 500 Index (-2.4% m/m) declined in February while shares in Europe and the U.K held up relatively better (FTSE 100 +1.5%) (Euro Stoxx 50 +1.3%).

In the U.S., headline inflation increased by 6.4% over January, higher than expected but at its slowest pace since October 2021. Annual core inflation was 5.6%, also modestly above expectations. Notably, January’s core personal consumption expenditures price index (the Federal Reserve’s preferred price gauge) was released, with the index jumping 0.6% m/m vs an expected 0.4% m/m – its biggest gain since August 2022. At the beginning of the month, the Fed voted unanimously to raise rates by 25 basis points (bps) to 4.75% (as anticipated), but the accompanying statement appeared more hawkish than expected, with Jerome Powell warning that the process of disinflation still had some way to go.
The resilience of the U.S. labour market once again exceeded expectations, as unemployment rates across many economies dipped below their pre-pandemic levels. Similarly, U.S. personal spending rose a solid 1.8% in January, the biggest increase in nearly two years, also well above expectations. On the services front, flash Purchasing Managers’ Indices published by S&P Global were broadly positive across the U.S., U.K. and Eurozone which suggests that central banks may face greater challenges curbing persistent inflation. 

The European Central Bank (+50 bps) and the Bank of England (+50 bps), both announced rate hikes at the start of February, in line with expectations. Despite the recent decline, inflation remains high, and the central banks' task is not yet complete - this was the key message conveyed by the banks’ accompanying statements. The annual inflation rate in the eurozone fell to 8.6% in January from 9.2% the month before, broadly above expectations.

China ramped up its support for its economic recovery in February, seeking to ease a squeeze in bank borrowing costs. The People’s Bank of China (PBOC) added a net 632 billion yuan into China’s fiscal system, its biggest ever cash injection, offering a short-term cash boost to lenders. China’s post-pandemic reopening is fuelling a sharp rebound in economic activity, with anticipated positive implications for both the domestic economy and its trade partners.

In South Africa, President Ramaphosa delivered his seventh annual State of the Nation Address (SONA). There were a few key takeaways from the President’s speech which addressed the current energy crisis, the declaration of a national state of disaster, the cost of living and unemployment as well as crime prevention. Finance minister Enoch Godongwana announced his 2023 Budget speech during the month. On balance, while macroeconomic risks persist, the 2023 Budget was in line with market expectations, reiterating government’s commitment to stabilising debt. 

The Financial Action Task Force (FATF), an inter-governmental organisation that underpins the fight against money laundering and terrorism financing, added South Africa and Nigeria to its ‘grey list’ in February. The country was greylisted for failing to comply with anti-money laundering and terrorist financing standards. Greylisting is expected to hike the cost of doing business in South Africa, discouraging foreign investment, and increasing the amount of due diligence companies have to carry out.

South African headline inflation fell to 6.9% in January, in line with expectations. Core inflation (excluding energy & food) remained unchanged at 4.9% (year-on-year), below expectations. At the same time business confidence dropped to a level of 112.90 in January, compared to a level of 117.30 in December 2022. On the market front, the JSE (All Share -2.19%) followed global peers lower, with resources (-13.23%) selling off due to lower commodity prices. The rand depreciated over 5% m/m against the greenback to end the month at 18.29 $/R.