Academy News 5 key fundamentals in 2023

Inflation in the US Interest rates US labour market data PMI Index Economic performance

5 key fundamentals in 2023

Published: 16.02.2023

Current market events still favour active traders and speculators rather than investors. If you are planning to take trading into your own hands this year, or if you have already done so, it will be useful to have an overview of key fundamental data. In this article, we will tell you which 5 fundamentals will be key for trading in 2023.

Few things can move the world's financial markets as much as the release of important data from the economic, political and corporate worlds. Traders generally refer to them as "fundamentals". Data has a tremendous ability to surprise markets. Movements of several percent in either direction, all in a matter of moments, are nothing out of the ordinary. Below we bring you 5 fundamentals from the US market that you should be watching closely this year.

Fundamental 1: Inflation in the US

Wednesday's January inflation in the US made it clear that we are still not out of the woods yet. Inflation rose by 6.4% year-on-year, while the market was expecting a rise of 6.2%. More importantly, core inflation, which is calculated without volatile food and energy prices, may be even more important. It rose by 5.6% year-on-year and also ended a tenth of a percentage point above estimates.

It is the core inflation that the US Fed regards as the most important and takes into account when setting its monetary policy. The biggest contributors to US inflation have been rising housing, insurance and clothing costs. By contrast, used car prices fell slightly.

Vývoj meziroční “headline” inflace v USA, zdroj: Tradingeconomics

_{Annual headline inflation in the US, source: Tradingeconomics}

January's inflation has put a bit of a stop to the overly-enthusiastic investors, who were already taking the fight against inflation as a done deal. However, we had expected January's figures to be slightly worse thanks to the very fact that many items are overvalued during January.

On the positive side, we can at least look at the longer-term trend in US headline inflation. This can be seen in the chart below. Since June, a clear downward trend can be noticed, which is causing increased risk appetite, especially among retail investors. However, their more professional peers are still cautious. From February onwards, inflation should already be falling at a faster pace and be somewhere around 3% by the end of the year in the U.S. However, interest rate settings will be key for the markets.

Očekávané kroky Fedu na dalším setkání 22. 3. Zdroj: CME

_{Expected Fed actions at the next meeting on March 22 Source: CME}

Fundamental 2: Interest rates

Another key indicator is the translation of inflation statistics into the Fed's expectations. It is already certain that interest rates will rise again by 25 basis points at the next meeting towards the end of March. The likelihood that interest rates will rise again at the same pace in early May has also increased. Interest rates could thus eventually rise to the 5.25%-5.5% range. However, a level 25bps lower still looks more likely to us.

However, the likelihood of higher interest rates is more likely to favour a strengthening US dollar. This may lead to higher pressure exerted on the equity and commodity markets. At the end of the year, the market is still pricing in one or two rate cuts in the US, but we may not see that at all. It is the mismatch in expectations around interest rate settings between the market and the Fed that is one of the biggest risks for this year. So inflation and interest rates in the US are absolutely key for most assets, including cryptocurrencies, forex, commodities and bonds.

Fundamental No.3: US labour market data

The above fundamentals are related to monitoring inflation and interest rates, which are closely interrelated. However, there is another equally important player - the US labour market. This is incredibly strong in the US, with unemployment at its lowest level since 1969. As positive as this information might seem, there are two sides to every coin. A strong labour market means upward pressure on wages and, consequently, more spending, which translates into rising inflation.

Vývoj úrovně nezaměstnanosti v USA, zdroj: Tradingeconomics

_{Unemployment rate in the USA, source: Tradingeconomics}

The central bank then has to tame this demand inflation by raising interest rates. This then leads to lower consumption, worse corporate performance and lay-offs. It can even lead to a financial crisis. In the US, unemployment even fell to 3.4% in January and the US economy even created 517 000 new jobs. Both figures pointed to a much more overheated labour market than expected.

Traders should watch:

Regular monthly statistics on the overall unemployment rate
Nonfarm payrolls (new jobs in the agricultural sector)
Thursday's regular unemployment claims statistics
Monthly wage growth statistics

The last indicator in particular is very important to the Fed. However, unless the labor market shows a significant cooling, the Fed will have no reason to change its stance around setting monetary policy, much less consider cutting interest rates this year.

Vývoj výrobního PMI v USA, zdroj: Tradingeconomics

_{US manufacturing PMI, source: Tradingeconomics}

Fundamental 4: PMI Index

The index of purchasing managers in manufacturing is a regular monthly statistic that is conducted among manufacturing executives in the US. It is essentially a litmus test of American manufacturing and, by extension, the economy. If the overall index is above 50, it means manufacturing expansion. If it's below 50, it means contraction.

The index is calculated from several subcategories, such as new orders, employment, production and inventories. The index shows a clear cooling since the beginning of 2022, which is related to rising inflation and interest rates. It is currently even at 47.4, the lowest since May 2020, when the market was hit by the coronavirus shock. US manufacturing is thus clearly showing a cooling and this is one of the signals that should prevent the US central bank from tightening interest rates too much. However, without a renewed rate cut, we cannot expect a significant rise in the index. During the great financial crisis of 2008, the index even fell below 35 points at times.

Fundamental 5: Economic performance

In stock markets, few things can cause such significant movements as economic results. During the wild year of 2022, we saw several stock rallies that managed to move the indices significantly even in such a pronounced bear market. We are currently in the second half of earnings season for the last quarter of last year and already have an interesting view on the current state of US companies.

As of February 10, 345 companies in the S&P 500 have reported their results. Of these, 69% beat market expectations for earnings. You are probably thinking that such numbers are not so bad. However, the statistical average over 5 years is 77% and over 10 years is 73%.

Dosavadní hospodářské výsledky v USA. Zisky jednotlivých sektorů ve srovnání s očekáváním trh. Zdroj: Factset

_{Economic performance in the USA to date. Sectoral profits compared to market expectations. Source: Factset}

So the companies' results are clearly lagging. Moreover, on average, they only beat market expectations by 1.1%. Again, let's look at the 5-year and 10-year averages, which are 8.6% and 6.4% respectively. Which sectors are suffering the most and vice versa? The chart below gives a clue. Public services have fared best so far, which is understandable given the non-cyclical nature of the sector. This is followed by technology and healthcare. At the other end are finance and real estate.

Dosavadní hospodářské výsledky v USA. Očekávání zisků v Q1 2023 u jednotlivých sektorů ve srovnání s očekáváním trhu. Zdroj: Factset

_{US economic results to date. Q1 2023 earnings expectations by sector compared to market expectations. Source: Factset}

But even more interesting is a look at the expected results for the first quarter of this year. Stock markets reflect the future rather than the present and the past. Again, we can rely on the data published so far. So far, only 71 companies have released their earnings guidance for the current quarter. Of these, 58 expect a worse first quarter than the market originally anticipated. Real estate and communications are again holding the shorter end of the stick. The best performers are technology and healthcare. It should be noted, however, that the earnings season is not yet over and the figures given are subject to change. The same goes for the outlook for Q1, where data is only available from about a fifth of the companies. However, the aforementioned data clearly point to a cooling in the US corporate sphere.

Important terms

Bearish / Bear market

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It is a designation for a falling market.

Fundamental analysis

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In fundamental analysis, the forex market is analyzed using macroeconomic data, social or political influences that can affect the demand for a given instrument.

Inflation

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A situation in the economy where prices are rising, reducing the purchasing power of consumers. It is a very important indicator for central banks. If inflation is low, it can be a signal to lower interest rates. If inflation is high, the central bank is likely to raise the interest rate.

Interest rate

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The most important indicator for fundamental analysis. Interest rates are set by central banks. A decrease in the interest rate can mean a weakening of the domestic currency and conversely an increase in the interest rate can lead to a strengthening of the currency.

Purchase Managers Index

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The Purchasing Managers Index (PMI) is an index of purchasing managers that indicates managers' expectations of whether the sector is due for expansion or contraction. If the index is above 50, it indicates expansion. A value lower than 50 indicates a sector contraction. The PMI is tracked for the manufacturing sector and for the service sector.

5 key fundamentals in 2023

Fundamental 1: Inflation in the US

Fundamental 2: Interest rates

Fundamental No.3: US labour market data

Traders should watch:

Fundamental 4: PMI Index

Fundamental 5: Economic performance

Important terms

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