Daily Update: February 2, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Cautious Pessimism Remains Order of the Day for U.S. Economy

Federal Reserve Chair Jerome Powell raised interest rates by 25 basis points on Feb. 1. This cautious increase is typical of the Fed’s approach to tackling persistent, but falling, inflation in the U.S. A decision not to raise rates might have unleashed undesirable optimism and spending. But a higher increase in rates might have been an overcorrection and driven the country into recession. The caution of the Fed reflects broader uncertainty among market observers about the direction of the U.S. economy — cautious optimism and cautious pessimism often coexist within the same analysis.

Across S&P Global, the weight of opinion is firmly on the downside, pointing toward cautious pessimism. However, there are some bright spots. A recent analysis from the Economics & Country Risk team at S&P Global Market Intelligence pointed to the unexpected resiliency of gross domestic product growth in the fourth quarter of 2022. Annualized GDP growth in the period was 2.8%, almost 2 percentage points more than was predicted earlier in the year. Labor markets remained tight with an unemployment rate of 3.5%, and investors were optimistic about loosening monetary policy in the second half of 2023. 

In addition, S&P Global Market Intelligence believes that inflation in the U.S. has rounded a corner. The consumer price index, or CPI, fell 0.1% in December 2022, reflecting a softening of inflationary pressure under tighter monetary policy. The fall in CPI is encouraging for the Fed, but certainly not sufficient. The overall increase in CPI for 2022 was 6.5%, which is not close to the Fed’s target of 2% inflation.

All this apparently good news disguises a more ambiguous economic reality. In a separate analysis, S&P Global Market Intelligence cautions that GDP growth in the fourth quarter of 2022 was driven by unusually high inventory investment, which accounted for over half of the growth. Other areas of outperformance were exports and government spending, which the team expects to revert to mean levels in the coming quarters.

Signs of weakness in the U.S. economy remain apparent. A recent analysis by Beth Ann Bovino, chief economist for the U.S. and Canada at S&P Global Ratings, found that of the 10 leading indicators her team monitors for the U.S. economy, eight were negative or neutral.

“Historically (going back to 1980), when over 50% of the indicators we track were negative, a recession followed within 12 months,” Bovino wrote.

Some sectors may already have entered a recession. The manufacturing sector has seen a falloff in industrial production as consumer demand shifts from goods to services. Retail sales have also declined due to falling consumer demand, and real estate and construction are notably weak.

The economic forecast at S&P Global points to a recession in 2023. However, the cautiously optimistic take is that that recession may be shallow and could ease in the second half of the year. 

Today is Thursday, February 2, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

S&P 500 Gains In January After Rough 2022

The S&P 500 logged positive gains in the first month of 2023, as inflation continued to relax and unemployment inched down to its lowest level since 1969. The broad market index grew 6.2% in January, outperforming the Dow Jones Industrial Average's 2.8% increase. The S&P 500 closed 2022 at its worst annual performance since 2008. The smaller-cap Russell 2000 soared even higher, up 9.7% for the month.

—Read the article from S&P Global Market Intelligence

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Capital Markets

Sputtering Global Economy Will Pose Complications For Latin American Insurers In 2023

S&P Global Ratings forecasts Latin America's economic growth to stagnate this year, which will weigh on insurers' business and operating conditions. This reflects its expectation of lower demand for the region's manufactured products and commodities from key trading partners — particularly the U.S. and China — as the world' largest economies lose steam.

—Read the report from S&P Global Ratings

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Global Trade

Global Factory Downturn Shows Signs Of Easing As China Re-Opens

Global manufacturing output fell for a sixth successive month in January, according to the JPMorgan Global Manufacturing Purchasing Managers' Index compiled by S&P Global, but the rate of decline showed welcome signs of moderating for a second successive month. Encouraging signals were also sent via a cooling in the rate of loss of order books and a marked improvement in business confidence about prospects for the year ahead. Sentiment was buoyed in particular by the news of China relaxing its COVID-19 containment measures.

—Read the article from S&P Global Market Intelligence

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Sustainability

China To Maintain Renewables Growth Pace In 2023 Despite Uncertainty

China is expected to continue adding more renewable power generation capacity in 2023 rather than coal-fired generation capacity, with a focus on deeper integration of solar and wind power to the grid, according to government data and S&P Global Commodity Insights forecasts. This means that China, for yet another calendar year, accounted for the world's most renewables growth, including a recovery in hydropower that was impacted by a severe drought in southwestern provinces in 2022.

—Read the article from S&P Global Commodity Insights

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Energy & Commodities

Canada – Mining By The Numbers, 2022

Canada's production of most metals remained strong in 2022. Most notably, gold output grew to 6.9 million ounces, which ranks the country as the fifth-largest producer. Based on estimates by S&P Global Commodity Insights, production from Canadian gold-producing assets will rise 61% between 2022 and 2025. While Canada slipped to fourth place for global palladium production, it rose to second place for uranium. The country continues to lag in base metals production, ranking outside the top 10 for copper, zinc and cobalt production.

—Read the article from S&P Global Market Intelligence

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Technology & Media

Tech M&A Outlook: Back On Track In 2023?

Even though tech M&A dropped sharply in late 2022, dealmakers see business picking back up this year. Almost half of respondents to 451 Research's annual Tech M&A Outlook survey predict an acceleration in activity in 2023. To pull that off, however, they are going to need acquisition prices to come back down and industry growth to go back up.

—Read the article from S&P Global Market Intelligence

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Upcoming Events

CERAWeek by S&P Global — Navigating A Turbulent World: Energy, Climate and Security

Join global leaders, policymakers and executives from across energy, climate, finance, technology and industry at CERAWeek 2023 for timely dialogue, shared learning and connection.

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