North America
US indices closed sharply lower as investors reacted to hotter-than-expected inflation news. Since the beginning of the rally in October, the S&P 500 has lost more than 35% of the gains made, still managing a year-to-date positive of 3.40%. The Dow Jones Industrial Average on the other hand had briefly entered negative territory. S&P 500, Nasdaq Composite & Dow Jones Industrial Average lost 2.67%, 3.33% & 2.99%, respectively. The Feds preferred inflation indicator, the PCE index (Personal Consumption Expenditures index) ticked up in January, serving a blow to investors’ optimism. Friday’s report from the Commerce Department showed that consumer prices rose 0.6% from December to January, a sharp rise from the 0.2% increase from November to December. On a year-on-year basis, prices rose 5.4%, up from a 5.3% annual increase in December. Prior to last week, the government published the consumer price index date (CPI) – which showed that prices jumped 0.5% from December to January, much more than the previous month’s 0.1% rise. The report served as a warning for investors, indicating that the Fed may keep hiking rates well into this year. With this, consumer spending reportedly rose 1.8% last month from December after falling the previous month. Consumer prices climbed 6.4% in January, below the recent peak of 9.1% in June, but still remained well above but above the Fed’s 2% inflation target. Known for his hawkish views, St. Louis Federal Reserve President James Bullard, boosted investor optimism during an interview, where he stated that he still thought that the Fed should bring rates to five and three-eighths—or 5.375%. Meanwhile, US intelligence has found that conversations have taken place within the Chinese government to aid Russia’s war effort, including supplying the Russian army with ammunition and weapons. President Joe Biden’s top national security adviser, Jake Sullivan said that the White House had not yet seen China provide Russia with lethal assistance in its war on Ukraine and warned Beijing that doing so would be against its interests. Sullivan said that the U.S. would remain “vigilant” in monitoring developments and that communicating possible consequences to Beijing for providing such assistance to Russia “is better done directly with Chinese counterparts in private”.

Europe & UK
European indices closed lower with their American peers as better-than-expected economic data left investors fearful that the European Central Bank (ECB) would double down on its tightening efforts. The pan-European STOXX Europe 600 Index, German DAX Index, French CAC 40 index & British FTSE 100 index lost 1.42%, 1.76%, 2.18%, and 1.57%, respectively. On the inflation front, the eurozone saw that price increases slowed in January to an annual rate of 8.6%, down from 9.2% in December. Core inflation (excluding fuel and food) showed that underlying price pressures continued to rise – accelerating to 5.3% from the 5.2% registered in December. In Germany, recent data releases showed that the German economy contracted by 0.4% in Q4 2022, double previous estimates of a 0.2% decline. Meanwhile, across the weekend and on Monday, Britain and the EU announced the agreement of new trade rules in Northern Ireland in an attempt to resolve trade issues that have fuelled Brexit tensions across the UK, EU & Northern Ireland. The deal is to be implemented in hopes of fixing the issues created by the Northern Ireland Protocol, an addendum to the Brexit deal agreed by Boris Johnson and the EU in 2019. The original protocol was created to prevent a hard border on the island of Ireland by keeping Northern Ireland aligned with the EU – thereby allowing goods to travel between the Republic and the Province unchecked. Prime Minister Rishi Sunak said that the new deal – the “Windsor Framework,” will allow for “smooth flowing trade” within the UK, as well as “protect Northern Ireland’s place” in the UK, “safeguarding” the sovereignty of Northern Ireland. Sunak said that the new deal would allow the UK government to determine VAT rates applicable in Northern Ireland, as opposed to the current system where the rates are determined by the EU. Sunak also announced a new system – “Stormont brake” that would give power back to Northern Ireland’s government, allowing them to pull an “emergency brake” on any new EU laws from being imposed on the province. If Stormont brake is activated, the Westminster government will also be given a veto over the law. Prime Minister Sunak now has the complicated task of convincing Northern Ireland’s skeptical politicians to proceed with the new deal.

Japan
Japanese equity markets closed lower developed market counterparts, investors growing concerned about a further tightening of international financial conditions. The Nikkei 225 index and broader TOPIX fell 0.22% and 0.18%, respectively. Japan’s factory output dropped at the fastest pace in 8 months in January as declining overseas demand took a heavy toll on key industries such as auto and semiconductor equipment. Factory output fell 4.6% in January from December 2022 – a larger-than-expected contraction with median forecasts being a 2.6% decline. Separate data showed retail sales to have contrasted this, having posted their sales posted their fastest growth levels in nearly two years – highlighting the divergent paths between soft manufacturing and robust service-sector activity. Meanwhile on the monetary policy front: the incoming Bank of Japan Governor, Kazuo Ueda, adopted a largely dovish tone, emphasizing monetary policy continuity but also acknowledging that the current policy had side effects. Ueda stressed that it will take time for the BoJ to achieve its 2% inflation target sustainably, and mentioned that with the current economic and price situation and outlook, it would be appropriate to continue with monetary easing. Ueda did mention that upon securing the inflation target, the central bank will be able to take steps to normalize monetary policy. Japan’s core consumer price index rose 4.2% year-on-year in January – the largest gain in over 41 years. On this, Ueda echoed the current BoJ Governor, Haruhiko Kuroda, stating that the main driver for these price hikes is cost-driven inflation due to rising import prices and not due to strong demand.