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5 economic indicators to navigate stock markets in 2023

Here are five of the most important economic indicators investors should be using to navigate stock markets in 2023.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Kathleen Brooks

Published on 7 March 2023

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

There are thousands of economic indicators and reports released every week. If you have a diversified portfolio, that spans multiple regions and sectors, then most of these indicators will be relevant for you. However, most of us don’t have the time to check economic data calendars multiple times a week.

Added to this, the current economic environment is particularly murky. Some indicators suggest the global economy will fall on its knees, while others, like employment reports, have never been as strong.

Economic data will continue impacting global interest rate decisions and the direction of the stock market. To help you take a view on the global economy, here are five economic indicators investors should be keeping their eye on.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. All investments and any income they produce can fall as well as rise in value so you could get back less than you invest. Past performance isn’t a guide to the future. Figures and metrics shouldn’t be looked at in isolation.

Kathleen Brooks is Founder of Minerva Analysis, a market analysis company. Hargreaves Lansdown may not share the views of the author.

1. Inflation data

From 2000-2020, inflation was mostly low and stable. The only place you had to watch closely was Japan, due to the threat of deflation.

However, the CPI, or consumer price index, is now the most important indicator that we can watch, as price growth surges in the US, UK, the Eurozone and even in Japan.

Inflation reports are normally released every month for the month before. They usually include a reading of headline and core inflation.

Headline inflation includes energy and food costs, while core inflation strips out commodity prices. Both core and headline inflation are important. However, while 2022 was all about rising levels of headline inflation, the focus in 2023 is all about core inflation.

Core inflation can help determine the trend rate of price growth and the ‘stickiness’ of inflation, which is crucial to determine the path of interest rates as we progress through this year.

The CPI report includes a monthly rate of change and an annual rate of change. Inflation is calculated on an annual comparison basis. This means headline inflation rates in 2023 are likely to be much lower than in 2022, as their starting points will be 2022’s high figures.

2. Wage growth

The key macro theme for 2023 is shaping up to be inflation, and how far central banks must hike interest rates to try and bring it down to their targets (2% for the Bank of England).

One of the best ways to gauge the stickiness of inflation is by looking at changes in wage growth. Historically, wage data and inflation have a positive correlation, so as inflation increases, wage growth also rises. The trouble with wage data is that it can be backward looking, and not particularly timely.

However, the European central bank has developed a new way of analysing wage trends in the UK and Europe. It derives wage data from job listings. This data is useful, since it’s related to marginal workers, and tells us about employers’ expectations for labour demand and what they expect to pay for labour in the future.

The most recent ECB data shows two important developments.

Firstly, wage growth in the Eurozone is catching up with the UK. And secondly, wage growth in the UK and the Eurozone is becoming more broad-based, with the number of industries posting annual wage growth of more than 3% increasing. This suggests that rising wage growth isn’t just a pandemic abnormality, it’s actually a broad-based phenomenon.

3. The US yield curve

The yield curve gives important signals about the health of the US economy. It measures the gap between long-term and short-term US government bond yields.

Yield curves are usually upward sloping – longer-term bonds typically have a higher yield than shorter-term bonds. That’s because investors demand a better return if they’re parting with their cash for longer. However, since June 2022, the US yield curve has inverted. This matters for financial markets, since historically a recession has followed a year after the yield curve inverts.

The theory behind the predictive powers of the yield curve is twofold.

Firstly, the US Treasury market is so large, at nearly $25 trillion, that it can serve as an early warning system when fractures start to appear in the economy.

Secondly, the yield curve is closely watched, so an inversion can trigger a recession because it erodes confidence in the economy.

Currently, the US yield curve is at its most inverted level since 1981, yet key data from the US continues to show a resilient economy. At some point in 2023, we should know if the predictive power of the yield curve is right and if there’ll be an economic downturn.

It’s also worth watching out for changes in the yield curve. If it starts steepening again, i.e. longer-term yields increase at a faster pace than shorter-term yields, then it could signal a shift in market sentiment.

The US yield curve

Source: Bloomberg, 03/03/2023.

4. Supply chains

While we hope pandemics are once in a lifetime events, the COVID-19 pandemic highlighted the risks inherent in a global economy.

When supply chains get gummed up, this can cause inflation to jump if goods are hard to find. This can then have a knock-on effect on interest rates like we spoke about above.

One index worth watching is the Citi Global Supply Chain Pressure Index. It integrates shipping rates, air freight rates and several supply chain related components from the Purchasing Manager’s Index (PMI) surveys across seven interconnected economies.

Supply chain disruption is likely to remain a major challenge for the global economy as the war in Ukraine continues into its second year and as the China/US strategic rivalry continues.

One year since the start of the Ukraine conflict – how the world's changed and what it means for investors

5. Commodity prices

As we enter the second year of the war between Ukraine and Russia, the importance of commodity prices has been brought into focus.

Russia and Ukraine are some of the world’s most important commodity producers of both energy and food, and when the invasion started, this coincided with a large spike in commodity prices.

Surging natural gas and electricity prices in the first half of 2022, combined with a general increase in prices due to tight global supply chains, caused inflation to rise at a rapid pace. However, as we move into 2023, the price of natural gas has fallen sharply, and is back to levels before the invasion of Ukraine. This should help inflation to moderate later this year.

Although higher commodity prices mostly had a negative impact on companies and countries, especially those that are energy intensive and those that rely on energy imports, it did benefit certain businesses – like energy companies. In 2022, Shell and BP both reported record-breaking profit levels for example.

Of course, above all, the conflict has sadly had a devastating human impact. However, the invasion of Ukraine has also highlighted just how important commodities are. And the sensitivity of stock markets to commodity prices is something investors might want to pay close attention to in the future.

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