Daily Update: The Catch-22 Economy
Today is?Monday, March 6, 2023, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global . Subscribe?to be notified of each new?Daily?Update.?
In his satirical novel Catch-22, author Joseph Heller invented the notion of a Catch-22 problem — a problem for which the solution is rendered impossible by the circumstances of the problem itself. An equity market that declines in value whenever there is good economic news is a Catch-22 problem because bad economic news would also cause equity markets to decline in value. But last month’s decline in the value of the S&P 500 is emblematic of a larger Catch-22 problem — one that is affecting economies in the U.S. and Europe.
On the surface, the U.S. economy looks?strong and resilient ?at the start of 2023. Labor market demand and consumer spending remain remarkably robust in the face of predictions of a first-half recession, although U.S.?manufacturing data ?has begun to show some softness. S&P Global Market Intelligence has?revised its tracking forecast ?for first-quarter gross domestic product growth, from negative 1.2% to negative 0.5%, due to an increase in retail sales and food services in January. But low unemployment numbers and robust spending create the exact conditions for inflation that the Federal Reserve is working to tame. Personal consumption expenditures — an important inflation metric used by the Fed — increased 4.7% in January 2023 from January 2022. Economists had forecast an annual increase of 4.6% in December 2022. Given the currently hawkish monetary policy at the Fed, this points to further rate increases through at least the first half of 2023.
The Fed has remained typically tight-lipped about its intentions. However, markets will be scrutinizing February's?U.S. labor market report ?when it is released this week. A further increase in nonfarm payrolls will be taken as a sign of more rate increases to come. The U.S. equity market has reacted gloomily to the apparent continued strength of the economy.?U.S. equities fell last month ?as investors worried about the Fed’s reaction to persistent inflation. The S&P 500 closed the month down 2.6%, while the Dow Jones Industrial Average dropped 4.2%.?
During this tightening cycle, the Fed has increased the federal funds rate target range by 4.5 percentage points. Higher interest rates should slow the growth in economywide spending, which should bring inflation back to the Fed’s 2% target. For example, the increase in mortgage rates, which are tied to the federal funds rate, has resulted in new mortgage applications plunging 18%.
The continued strength of the economy and ongoing inflation represent a challenge to the Fed. So far, the Fed has remained resolutely focused on increasing rates until inflation returns to 2%, regardless of the impact on the larger economy in terms of a hard or soft landing. Fed Chairman Jerome Powell has rejected suggestions that the Fed should consider?raising its inflation goals to 3% or 4% . Economists have suggested that the Fed must continue its aggressive monetary policy to signal its seriousness to the market. The U.S. economy, it seems, is like a high-spirited cocker spaniel that requires calm and assertive energy to modulate its behavior. In this Catch-22 economy, good news is bad news.
Today is?Monday, March 6, 2023, and here is today’s essential intelligence.
Written by Nathan Hunt.
Economy
S&P 500 Sheds 2.6% In February As Inflation, Interest Rate Worries Persist
U.S. equities fell in February as investors weighed just how high the Federal Reserve will push benchmark interest rates to curb inflation, which may be on the upswing again. The S&P 500 closed the month down 2.6%, while the Dow Jones Industrial Average dropped 4.2%. The smaller-cap Russell 2000 also closed in the red, falling 1.8% for the month. Markets are betting that the Fed has more rate hikes planned in 2023, as the latest reading on inflation landed higher than expected. The central bank is trying to tame rising prices as rental rates and the cost of other services, including vehicle repairs and airfare, continue to increase.
—Read the article from?S&P Global Market Intelligence
Capital Markets
GCC Insurers In 2023: Strong Growth And Lackluster Earnings Could Squeeze Capital Buffers
Gulf Cooperation Council insurers are reaping the benefits of ongoing economic growth in the region. The expansion of infrastructure projects and growth of medical insurance will continue to spur premiums in 2023, albeit at a slower pace than in 2022.
—Read the report from?S&P Global Ratings
Global Trade
领英推荐
Russian Oil Product Exports Slide As EU Import Embargo Bites
Russian oil product exports, the target of the West's latest round of efforts to curb Moscow's oil revenues, fell by a fifth on the month in February to the lowest since May 2022 as new buyers in Africa failed to absorb Russian fuels displaced from Europe, according to tanker tracking data. Russia-origin seaborne oil product exports averaged 2.13 million b/d in February, a 21% slump from recently elevated levels of around 2.7 million b/d in January and 24% below average pre-war levels, according to S&P Global Commodities at Sea data.
—Read the article from?S&P Global Commodity Insights
Sustainability
Watch: What Determines The Price Of A Carbon Credit?
What's the difference between credits from removal and avoidance projects, what's a carbon credit "vintage" and what other factors impact market prices? S&P Global Commodity Insights explains.
—Watch the video from?S&P Global Commodity Insights
Energy & Commodities
Five Anticipated Trends In 2023 For Global Power And Renewables Markets
In 2022, global energy markets were shaken by the Russia-Ukraine war and Russia's interruption of gas supplies to Europe, momentous clean energy legislation in the United States and other major markets, post-COVID-19 global economic growth (albeit dampened by China's continued lockdowns), supply chain disruptions, and rising inflation, and important climatic events such as droughts in Europe and China.
—Read the article from?S&P Global Commodity Insights
Technology & Media
Digital Bonds: The Disruption Is Underway
A digital overhaul is gaining momentum in one of the more stubbornly analog sectors of the capital markets. Digital bond issuance totaled about $1.5 billion over the past year, up from almost nothing a year earlier. S&P Global Ratings expects that trend will continue. For the time being growth remains tentative, though widely spread. Sovereign and corporate issuers have tapped the nascent digital compartment with small issuances, principally to trial new systems. That has been facilitated by traditional finance intermediaries, such as exchanges and banks, which still have a tight grip on the market, although their roles are evolving.
—Read the report from?S&P Global Ratings