Various data were responsible for injecting optimism into the markets. The first was having seen in December, that general inflation and underlying inflation to November stood at 7.11 and 5.96%, respectively, in the United States.
We start 2023 with great enthusiasm; However, among the markets and ordinary people, the key question at the beginning of this year is whether the central banks, especially the US Federal Reserve, will manage to control inflation and whether its economy will have a soft landing, or if he will continue to aggressively raise rates causing the world’s largest economy to have a hard landing and we fall into a global recession.
After the bad closings of 2022 for the stock markets due to the aggressiveness with which the central banks raised their interest rates throughout the year, where the NASDAQ fell a shocking 33.1%, the S&P 500 19.4%, the DOW Jones 8.8% , the main European and Asian stock markets with double-digit losses and the CPI of Mexico fell 3.5%, all in dollar terms, we started the year with great optimism, where most investors threw themselves into the party betting on a rapid fall and an effective control of inflationary pressures, without the economy reaching recession levels, that is, a soft landing.
Several data were responsible for injecting optimism among the markets. The first was having seen in December that both general and subjacent inflation were falling in the United States as of November, settling at levels of 7.11 and 5.96% respectively.
Unfortunately in Mexico, the general inflation data from October to November showed a significant drop from 8.41 to 7.80%; however, the underlying data, which is key to determine if inflationary pressures are easing, since it eliminates volatile elements such as food and energy, not only not low, but rather rose, going from 8.42 to 8.51% in the same period.
In this first fortnight, the markets were finally able to find out the inflation data for the month of December, where in the United States they fell sharply again, leaving the general at 6.45 and the core at 5.71%, which sent a signal of confidence to the markets. that the Fed would no longer have to be so aggressive in raising rates.
In the case of Mexico, although it is true that in December headline inflation rose to 7.82% compared to the 7.80 already mentioned, for the first time core inflation was seen to drop, remaining at 8.35 percent.
To this would be added the employment data issued by the United States Department of Labor for the month of December, which shows a creation of 223,000 new jobs, above market expectations.
In contrast, the IMSS reported the loss of 346,000 jobs in the same month.
That said, and given the expectation of a rapid drop in inflation and not economic growth, and given the possibility that the Fed and the rest of the central banks would stop raising rates aggressively, the dollar depreciated against the main currencies, where the Mexican peso was one of those that appreciated the most, breaking the floor of 19 pesos/dollar and closing last Friday at levels of 18.75 pesos/dollar, advancing 2% in the week.
In contrast, presentations by some Fed members left markets uneasy, signaling that they still sense inflationary pressures, which could mean the Fed won’t ease much on interest rates, while that the World Bank pulled out the scissors and sharply cut growth expectations for the global economy in 2023, placing it at an incipient 1.7%, where it estimates that China would grow only 4.3%, the United States barely 0.5% and the euro zone will not grow at all, while for Mexico I place it at 0.9% from the 1.5% that I had originally estimated.
Where will the balance tip? We’ll see, but for now, we’ll have to keep an eye on what happens at the Davos Switzerland Forum this week.
