Market Report – markets optimistic on inflation outlook, US earnings disappoint

by | Feb 3, 2023

Written by Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown

Markets gained on Thursday, despite a collective 125 basis points of tightening by central banks within 24 hours. The FTSE 100 closed up 59 points, while the Nasdaq was up over 3% and European equities also enjoyed a boost.

The reason for the optimism lies in the fact markets are forward looking, and they can see a path out of the current economic slump. More specifically, there’s renewed hope we’ve reached peak inflation, which will cement central banks’ ability to pause interest rate hikes.

The Bank of England has upgraded its growth forecast for the UK, with a shallower recession than previously expected for 2023 now on the cards. CPI is slated to fall back to 3.1% by the first quarter of 2024, and for inflation to be well below the government’s 2% target by 2025. Over in the US, Shelter costs, which includes mortgages, rent and building fees, has also started to temper. This has proven stubborn, and its loosening is a strong indicator of trends to come.

While there’s more optimism broadly, the US has had a tough time on the earnings front, which is expected to see the US give up some of its recent market gains. Tech giant Apple’s sales dropping 5% to $95bn. The group laid the blame at production issues in China which held back performance, but there are also concerns about consumer sentiment.

Apple missed both sales and profits targets partly because of lower demand for iPhones, which is hardly a surprising development given the economic pressures in its core markets. By its own admission, Apple is in a challenging spot, but share price losses have been reasonably muted given the circumstances because of the ongoing belief in the power of Apple’s brand and services ecosystem.

Starbucks also came up short of expectations, because of surging Covid cases in China which has put a lid on growth. In China, which is Starbucks’ second-largest market, there was a 28% fall in transactions in cafes that have been open at least 13 months. Store closures and weak demand in the region aren’t expected to reverse overnight and this will weigh on sentiment. But let’s not forget, the group generated $855.2m in net income – there are no questions about Starbucks’ scale or brand power for the time being, especially when you consider the 10% rise in same-store sales in the US. The group’s navigating obstacles rather than coming off course.

Brent crude is trading at $82 a barrel as it heads for its second weekly loss. There are lingering uncertainties about China’s demand recovery, at the same time as US stockpiles increasing. Should the decline be prolonged, the extent and speed at which this will be passed onto consumers is very much in the spotlight after Shell’s record profits.

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