After a rare negative underperformance of both bonds and equities in 2022, January 2023 bounced back
with vengeance.
The question now being asked, is whether this momentum can be maintained as the market is now pricing the goldilocks’ soft-landing scenario driven by immaculate disinflation.
G10 central banks are closing in on their end of cycle rate targets, focus will now transition to labour
markets as inflation continues slowing under the weight of base effects. Wage, rent and food inflation in
general have been sticky, however distinct sharp drop offs are being experienced in retail and housing
market sales. Financial conditions have reversed from the highs bringing some relief to general voters but
in turn will entice stronger messaging from central banks for “higher for longer”. Pleasingly, energy storage
levels stay elevated in Europe relative to the historical seasonal average which has led to gas and oil prices
falling and potentially deferring energy price cap increases. Stronger GDP data in Europe and China has
given a positive boost.
However, the general perception is we are in a bear market rally in equities and are likely to experience
many similar rallies in a year of declining demand and policy transition. Notably there are no general
elections this year within G7 and thus may lower volatility potential at the margin. But looming on the
horizon is the change in governor at the BoJ and a likely political impasse of the US treasury statutory
debt limit.
Over the month the BoC hiked by 25bp and notified a pause. The Norges Bank and BoJ were unchanged.
The US 10y closed the month 39.3bps lower and 5s-30s swap was 9.6bps steeper.
