2024 Weekly Update

Market update

The S&P 500 closed the week at 4,839.81, +1.25% higher. The Dow Jones closed at 37,863.80, +0.41%, with the Nasdaq higher by +2.28%. The volatility index VIX closed the week at 13.30 up from 12.70. The Euro Stoxx 600 slipped -2.12%.

The 10-year UST closed at 4.12% up from 3.94% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -125bps. US Corporate Bond spreads: Investment Grade tightened 6bps at 169bps and High Yield tightened 11bps at 384bps. German 10-year Bunds yield closed at +2.34% up from +2.18% 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) appreciated +0.86% last week and closed at 103.29. The Euro closed at 1.0898 (-0.48%); the Yen depreciated -2.24%, closing at 148.12 and the Swiss Franc depreciated -1.89%, closing at 0.8684. Gold closed at $2,029.49 depreciating -0.96%. Oil was higher, Brent closed at $78.56 (+0.34%) and WTI at $73.41 (+1.00%).

Macroeconomy

US data

US retail sales beat expectations with seasonal distortions likely impacting the data. Due to early holiday shopping, December seasonal adjustment have become more favorable this year. Holiday shopping categories, including non-store retailers, clothing, and general merchandise stores, registered large increases, indicating seasonal adjustment at play. Some paybacks should be expected in January as the cost of living adjustment for social security checks will not be as generous as in 2023. US initial jobless claims fell to the lowest since 2022. The turn of the year and the harsh winter weather could have distorted the data, but the labor market continues to chug along. Housing is in the initial phase of the recovery with continued increases in single-family permits. Congress passed another short-term continuing resolution to avoid a government shutdown. It is a top line spending deal that largely mirrors the debt limit deal from 2023. The third short-term deal in four months. This bill would extend the current expiration dates for government funding - Jan. 19 and Feb. 2 - until March 1 and 8.

Taiwan election

Taiwan DPP’s presidential candidate, Lai Ching-te, won the election as market expected with 40.1% votes. But the incumbent party (DPP) lost its dominant position in legislative yuan, with no party gaining majority. KMT (main opposition party) won the most seats (52 out of 113 seats). Overall, the election results suggest DPP’s policy agenda will likely be restrained by a hung legislature, and more centrist orientation of policies (including China-related matters) are likely over the next four years. On Cross-Strait relation, we expect policy directives remain status quo with limited progress in the near term. From market perspective, the expected election result should be considered a neutral outcome.

China data

Chinese GDP expanded by 5.2% y-o-y in Q4, or 1.0% q-o-q, seasonally adjusted, according to the Chinese National Bureau of Statistics, slightly below market consensus of 5.3% (or 1.1% q-o-q sa). For the full year of 2023, the Chinese economy expanded by 5.2% in 2023. Growth in nominal retail sales came in at 7.4% y-o-y in December, down from 10.1% in November and below market expectations of 8.0%. In sequential and seasonally adjusted terms, retail sales picked up to 0.4% m-o-m in December, from 0.1% in the previous month. The recovery in household consumption stayed soft in Q4 with an average growth at 0.3% m-o-m (sa), below 0.5% in Q3 23, and 0.7% in the pre-pandemic years (2018-2019). Chinese consumer confidence level stayed well below pre-covid level at 87.0 in November 23, while urban household saving rate remained elevated at 40.2% in Q4 23. The overall unemployment rate also ticked up to 5.1% in December, from 5.0% in the previous three months, suggesting the overall labor market condition in China remains soft. On the property front, most indicators continued to contract in December, with growth in housing completion as the only exception. Higher-frequency data also point to further weakening of housing demand in early January (average of -34.0% y-o-y). Since Q4 2023, the Chinese policy makers have stepped up policy support to stimulate the economy, especially on the fiscal front. While these measures have led to some visible improvement in the infrastructure space and in industrial activity, they have failed to lift consumer and investor confidence and to boost the overall economic momentum.

Highlights

On rate expectations

The bond market sold-off as market participants adjusted their expectations for central bank policy rates. This adjustment was triggered by encouraging economic data from the US and hawkish rhetoric from central bankers. In the US, Fed Governor Waller pushed back on market expectations for rapid rate cuts by saying that he saw “no reason to move as quickly or cut as rapidly as in the past”. He added that if “inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year.” But his view was that cuts should proceed “methodically and carefully”, and that he’d also be focusing on the CPI revisions scheduled for February 9. In Europe, ECB President Lagarde struck a concerned tone about market pricing, saying that it was “not helping our fight against inflation, if the anticipation is such that they are way too high compared with what’s likely to happen”. Dutch central bank governor Knot made similar comments to Lagarde, saying that markets were “getting ahead of themselves, it’s pretty clear, and the problem for us is that in the end that might become self-defeating”. The pricing for a cut by March from the Fed was down to 40%, having been at 69% a week ago. Likewise for 2024 as a whole, the amount of cuts priced in by the December meeting came down from -157bps the prior week to 132bps by the end of the week. In Europe, expectations moved in the same direction with a rate cut by March is currently priced at 14% (vs. 26% a week ago). The UK Gilt bond market faced the largest drawdown, due to a higher December's inflation than expected. The CPI came in at 4.0% vs. expected 3.8%, with core CPI at 5.1% vs. the projected 4.9%. This led investors to scale back their expectations of rate cuts by the BoE. Currently, the total anticipated rate cuts for 2024 stand at 4 (25bps per cut).

Earnings season

The earnings season has commenced, with 52 S&P companies (approximately 10% of the total) having reported their results. A positive trend can be observed as 70% of the S&P 500 companies that have reported so far have exceeded earnings estimates, surpassing the performance of the previous quarter. However, the proportion of companies surpassing sales expectations has decreased and currently stands at 40%. At the index level, the average net income surprise has slightly increased to 5.6%, up from 5.2% in the third quarter. On the other hand, the average sales surprise has declined to approximately 1%, compared to being above 1% in the previous quarter. Except for the Energy sector, all S&P 500 sectors that have reported earnings have demonstrated positive surprises. Notably, the Travel and Leisure, Consumer Product, and Real Estate sectors have exhibited the highest number of positive surprises. Nearly half of the sectors have delivered negative average sales surprises, with the Energy sector leading in negative surprises. Conversely, the Personal Care, Travel & Leisure, and Healthcare sectors have demonstrated the most positive sales surprises.

What to watch

• Monday: US Leading Index (Dec.)
• Tuesday: Eurozone Consumer confidence (Jan.); Bank of Japan meeting; US Richmond Fed manufacturing index (Jan.)
• Wednesday: Eurozone HCOB PMI (Jan., prel.); US S&P PMI (Jan., prel.); UK S&P PMI (Jan., prel.)
• Thursday: Germany IFO report (Jan.); ECB meeting; US Durable goods (Dec., prel.), Initial jobless claims (Jan. 20), New home sales (Dec.), GDP (4Q)
• Friday: Japan Tokyo CPI (Jan.); US Personal income and spending (Jan.)