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In the US, domestic consumption appears to have accelerated in the first quarter, supported by a buoyant labour market, robust wage growth and a savings surplus that has yet to be exhausted, write Guy Wagner and his team in their latest monthly market report "Highlights".

The increase in layoffs in sectors that benefited from the pandemic is still more than offset by the creation of new jobs in service activities. “In Europe, even the industrial sector is showing signs of improvement, with lower oil and gas prices allowing companies to regain control of their production costs,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. “In China, the end of the zero-covid policy and the reopening of the economy are generating an economic recovery that looks promising, with purchasing managers' indices showing a strong rebound.” In Japan, GDP in the fourth quarter of 2022 grew by 0.2% quarter-on-quarter, thanks to continued growth in domestic consumption and exports.

A further ECB interest rate hike seems almost certain

Given the resilient nature of economic activity and recent mixed inflation numbers, the US Federal Reserve may have to increase the final level of the target range for the federal funds rate at its next meeting in March. However, the pace of rate hikes in 25 basis point increments does not appear to be in question. “In Europe, a further 0.5% interest rate hike in March seems almost certain.”

Rebound in long-term interest rates

Favourable economic growth and mixed inflation data led to a rebound in long-term interest rates, erasing their January decline. The benchmark 10-year rate rose in the US, in Germany, in France, in Italy and in Spain.

Soft landing rather than a recession?

After rebounding considerably in January, stock markets consolidated their gains in February. “The strong resilience of the global economy is supporting stock prices, fuelling hopes that the slowdown in activity will result in a soft landing rather than a recession,” says the Luxembourgish economist. “Only the emerging markets gave up much of the gains made in January when the Chinese economy reopened.” At the sector level, divergences were rather moderate, with technology, industrials and financials showing the best performances, while utilities, real estate and materials recorded the least favourable outcomes over the month.

The rise in the dollar had a negative impact on precious metals prices

After the euro's rebound against the dollar since September 2022, the European currency depreciated in February, falling from 1.09 to 1.06 during the month. The strengthening of the dollar was the result of speculation that the end-of-cycle target range for the US federal funds rate might be increased. “The rise in the dollar had a negative impact on precious metals prices,” concludes Guy Wagner.

Guy Wagner, Chief Investment Officer

An economics graduate from the Université Libre de Bruxelles, Guy joined Banque de Luxembourg in 1986 where he was head of the Financial Analysis and Asset Management departments. He was appointed Chief Investment Officer of BLI – Banque de Luxembourg Investments in 2005.

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