2024 Weekly Update

Market update

The S&P 500 closed the week at 4,783.83, +1.84% higher. The Dow Jones closed at 37,592.98, +0.34%, with the Nasdaq higher by +3.09%. The volatility index VIX closed the week at 12.70 down from 13.35. The Euro Stoxx 600 surged +0.12%.

The 10-year UST closed at 3.94% down from 4.05% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -144bps. US Corporate Bond spreads: Investment Grade tightened 6bps at 169bps and High Yield tightened 11bps at 384bps. German 10-year Bunds yield closed at +2.18% up from +2.16% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 151bps and High Yield spreads tightened 25bps to 371bps.

The US Dollar Index (DXY) depreciated -0.01% last week and closed at 102.40. The Euro closed at 1.0951 (+0.07%); the Yen depreciated -0.17%, closing at 144.88 and the Swiss Franc depreciated -0.27%, closing at 0.8523. Gold closed at $2,049.06 depreciating -0.18%. Oil was lower, Brent closed at $78.29 (-0.60%) and WTI at $72.68 (-1.53%).

Macroeconomy

US inflation

Monthly headline CPI was stronger than expected at +0.3% vs. +0.2%, which in turn pushed the y-o-y number up to +3.4%. Core CPI also came at +0.3% for the month, in line with expectations, but the y-o-y number only slowed by a tenth to +3.9% (vs. +3.8% expected). So, the progress on disinflation is proving slower than hoped, and that’s also evident by just focusing on the last 6 months of data. On a 6-month annualized basis, core CPI was up from +2.9% to +3.2%, and headline CPI was up from +3.1% to +3.3%. One of the factors pushing up inflation was shelter, which was running at +0.46% in Dec. But shelter takes up a much larger weight in the CPI index than it does in the PCE index, with the latter being the inflation measure that the Fed officially targets. We will get the PCE number on Jan. 26, and in Nov. it was already running at 2.6% y-o-y, half a point below the CPI print at 3.1%. PPI (Producers Price Index) dipped 0.1% last month. Data for Nov. was revised to show the PPI falling 0.1% instead of being unchanged. The PPI has now declined for three consecutive months. Economists had forecast the PPI rebounding 0.1%. Goods prices dropped 0.4%, with a 12.4% decline in the cost of diesel fuel accounting for half of the decrease.

Quantitative tightening

Quantitative tightening (QT), contractionary monetary policy, taper is likely to start earlier than expected. The Fed’s goal is to reduce the balance sheet without undue damage to the funding market. They seem to prefer to slow the pace of runoffs earlier to better determine the level of ample/lowest comfortable level of reserves. An earlier taper is not a signal that monetary policy easing (rate cuts) will arrive ahead of schedule. The exception is a deep recession, where rate cuts and QT stop are likely to occur simultaneously. During the QT of 2017 to 2019, the decline in the Fed’s securities holdings resulted in a decline in reserve balances. Reserve balances were run down to a level that eventually triggered funding pressures in September 2019. The Fed wants to be more cautious this time around. So far, the QT has happened through a rundown in reverse repos, and reserve balances are stable. As reverse repo balances continue to decline, pressures will rise for reserves, hence the Fed’s preference to start the process of tapering QT.

Inflation in Switzerland

Swiss CPI inflation rose by 30bps to 1.7% y-o-y in Dec. Inflation averaged 1.6% in Q4, in line with the latest SNB forecast and well within the SNB’s target range of “below 2%”. Looking ahead, headline inflation should accelerate, around 1.8-1.9% y-o-y in Q1, driven by the increase in electricity prices, the rise in VAT rates and rents. The Swiss National Bank (SNB) will report a loss of CHF3bn in 2023, after a loss of CHF132bn in 2022. The loss will affect both dividend payments to the SNB shareholders and the profit distribution to the Confederation and the cantons.

China data

Chinese Dec. inflation and trade data suggest moderate recovery. Headline CPI inflation in Dec. picked up slightly to -0.3% y-o-y (or 0.2% m-o-m) in Dec. Chinese full-year headline inflation in 2023 came in at 0.2%. The sub-indices for both consumer goods and services edged up to 0.1% m-o-m in Dec., after contracting for three consecutive months in late 2023, and suggesting a mild recovery in household consumption. PPI inflation remained negative at -0.3% m-o-m in Dec., partly due to the lagged impact of the decline in crude oil prices and also in line with the recent softness in Chinese manufacturing PMI (49.0 in Dec.), suggesting the recovery in the industrial sector remained moderate. Chinese export growth continued to improve to 2.3% y-o-y in Dec. Import growth also turned positive at 0.2% y-o-y, mainly driven by the rise in demand for energy and materials. China’s central bank held a key interest rate steady this morning.

Highlights

Earnings preview

S&P 500 EPS is forecasted to grow +4.3% in 4Q; however, individual groups are expected to vary significantly, with Tech up 33.2%, and Energy & Materials down -24.7%. These differences are expected to wane in 2024, with S&P 500 growth at 10.3%, Tech at 18.0%, and the rest of the benchmark at 7.4%. Growth is expected to be positive in every sector for the year. The S&P 500 entered a 3-quarter-long earnings recession in late 2022. Last quarter, 3Q23, marked the beginning of an earnings recovery, which is forecasted to reaccelerate throughout 2024. More accurately, the market is experiencing two independent, underlying trends: Tech experienced a 4-quarter-long earnings recession, which ended in 1Q23, with its strongest quarterly results likely this reporting season; the rest of the market, by contrast, is in the third quarter of an ongoing earnings recession. In terms of earnings revisions, earnings estimates tend to follow a pattern: they start too high, adjust lower, only to be topped by actual results. Revisions for 4Q EPS have been 330bps weaker than the historical trend, driven by negative adjustments in Health Care, Energy, and Materials. By contrast, full-year 2024 estimates have been adjusted higher by 240bps, driven by Technology and Discretionary.

Bank earnings

JPMorgan reported lower profitability as the US banking giant set aside around $3bn to boost its deposit insurance fund in case other banking institutions fail. Bank of America's earnings fell, while the revenues missed analysts' estimates. Citigroup reported a loss of $1.8bn as the bank recorded large charges, including for replenishing the Federal Deposit Insurance Corporation (FDIC) fund after the industry shocks experienced in early 2023. Well Fargo's earnings and revenue rose, also announced a jump in its guidance and warning that interest income will be lower in 2024. In general, bank executives believe US consumers have weathered the Federal Reserve’s cycle of interest rate rises in good shape. However, the banks noted that savers had less money in the bank than 12 months ago as they continued to spend, while defaults have started to climb. Bankers warned that keeping the unemployment rate low, at about 3.7%, would be crucial to ensuring loan losses remained at manageable levels. In a sign of a worsening credit environment, all four banks reported that the net charge-off rate (the portion of loans with losses that are marked as unrecoverable) had risen in Q4 to the highest level since the pandemic. Collectively, the banks set aside more than $8bn in reserves to cover potential loan losses during the final three months of 2023, up from $6.2bn a year earlier.

What to watch

• Monday: 2024 US election: Iowa caucuses; US equity market closed for Martin Luther King day; Eurozone Industrial prod. (Nov.)
• Tuesday: Eurozone ZEW survey expectations (Jan.)
• Wednesday: US retail sales (Dec.), Beige Book, Industrial prod. (Dec.); UK CPI (Dec.); China GDP (Q4), Industrial prod. & retail sales (Dec.)
• Thursday: US initial jobless claims (Jan. 13), Philadelphia Fed business outlook (Jan.), Building permits (Dec.), Housing starts (Dec.)
• Friday: US U. of Michigan (Jan.), Existing home sales (Dec.); UK retail sales (Dec.); Germany PPI (Dec.); Switzerland Producer & Import prices (Dec.)