2024 Weekly Update

Market update

The S&P 500 closed the week at 4,890.97, +1.06% higher. The Dow Jones closed at 38,109.43, +0.65%, with the Nasdaq higher by +0.94%. The volatility index VIX closed the week at 13.26 down from 13.30. The Euro Stoxx 600 surged +2.87%.

The 10-year UST closed at 4.14% up from 4.12% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -123bps. US Corporate Bond spreads: Investment Grade tightened 8bps at 161bps and High Yield tightened 12bps at 372bps. German 10-year Bunds yield closed at +2.30% down from +2.34% a week before. In Europe, Corporate Investment Grade spreads tightened 8bps at 143bps and High Yield spreads tightened 3bps to 368bps.

The US Dollar Index (DXY) appreciated +0.14% last week and closed at 103.43. The Euro closed at 1.0853 (-0.41%); the Yen depreciated -0.02%, closing at 148.15 and the Swiss Franc appreciated +0.48%, closing at 0.8642. Gold closed at $2,018.52 depreciating -0.54%. Oil was higher, Brent closed at $83.55 (+6.53%) and WTI at $78.01 (+6.27%).

Macroeconomy

US Q4 GDP

Real GDP in Q4 managed to beat all Bloomberg forecasts, rising strongly by 3.3% q-o-q annualized (vs. consensus of 2.0%). Relative to expectations, most of the upside surprise was in the volatile inventories category, which managed to contribute 0.1% to headline growth after an outsized 1.3% contribution last quarter (and against expectation of a drag). Consumption growth also came in a touch stronger than expectation, rising at a solid pace of 2.8% (2.5% expected).

US data

Quarterly core PCE inflation came in at 2.0% q-o-q annualized, following a similar reading in Q3. The measure has reached the Fed target for two consecutive quarters already. The Dec. PCE was mostly inline, including headline m-o-m (+0.2% vs. -0.1% in Nov.), headline y-o-y (+2.6% vs. +2.6% in Nov.), and core m-o-m (+0.2% vs. +0.1% in Nov.), although core y-o-y undershot coming in at +2.9% (a 30bp deceleration from +3.2% in Nov and below the +3% forecast). Durable goods fell further into deflationary territory (-2.3% vs. -2.1% in Nov.) while nondurable goods inflation accelerated (+1.3% vs. +0.7% in Nov.). Services prices decelerated to +3.9%, down from +4.1% in Nov., +4.3% in Oct., +4.6% in Sept., +5.1% in July, and +5.1% in June. The initial jobless claims were above expectations over the week ending Jan. 20, at 214k (vs. 200k expected), but even with that, the 4-week average still fell to its lowest in almost a year, at 202.25k.

European Central Bank

The European Central Bank (ECB) remained on hold. There was no major surprise coming from ECB press conference, but in general the tone is more hawkish. Lagarde said that the consensus inside the ECB was that “it was premature to talk about cuts”, but she could have pushed back more strongly against market pricing (betting on more than two 25bps rate cuts by June). That she decided not to is an important signal in itself. She reiterated that the ECB is firmly in data-watching mode for now and highlighted the importance of wage developments for the inflation outlook, but she did not sound as concerned about wage growth as she used to be. The ECB’s Q4 2023 Bank Lending Survey showed that credit standards tightened and that loan demand contracted further in Q4 2023. However, the pace of credit standard tightening and the decline in loan demand was less severe than in Q3 2023. In all, the pass-through of monetary policy tightening is still working its way through financing conditions and there is more to come in the pipeline.

Europe PMI

Flash composite PMI for the euro area rose by 0.3 points in January to 47.6, slightly below consensus expectations (48.0). The rise in the headline composite PMI was mainly due to the manufacturing PMI index, which rose by 2.2 points to 46.6 in January, while the services PMI index was down by 0.4 points to 48.4. It is worth mentioning that part of the increase in the manufacturing PMI index was due to supply-chain disruptions to shipping in the Red Sea, but there was also evidence of a positive shift in key manufacturing indicators such as output, new orders and new export orders. On prices, despite potential additional costs associated with shipping delays, manufacturing average input costs fell in January. The PMI report signaled a slight intensification of inflationary pressures in services. In all, the preliminary PMI surveys for January are consistent with sluggish growth in Q1, after a stagnation in H2 2023.

Bank of Japan

The BoJ keeps its policy rate unchanged at -0.10% in Jan. as expected, while keeping its ambiguity in tone. Main highlight of Ueda's press conference was the multiple mentions of the message that the certainty level of stable inflation is rising gradually. On yield target and JGB purchases, BOJ seeks to minimize discontinuity while noting risk of market disruptions due to policy changes would be taken into consideration. The 10-year JGB yield stayed largely stable after the press conference on Tuesday at 0.65%. Investors continue to see a rate hike in H2 24. Tokyo inflation in January surprised on the downside at 1.6% y-o-y (vs consensus of 2.0%), partly due to high base effect on energy. But other categories, including services, also see broad-based easing.

Highlights

Earnings season

As of Friday, 26.5% of the S&P 500's market cap had reported. Q4 expectations are for revenues to grow 2.7% and EPS by 5.2%. Growth among groups varies significantly. Earnings are beating estimates by 5.3% in aggregate, with 74% of companies topping projections. EPS is on pace for 9.1%, assuming the current aggregate beat rate of 5.3% for the rest of this season. Stock performance following surprises has been quite poor this season. Companies beating on both sales and EPS are outperforming by 1.5% vs 1.7% historically, while those missing on both are underperforming by -5.7% vs. -3.1%. The Q4 reporting season will be especially challenging for investors to navigate, given the wide dispersion in expected results. Revisions for the quarter are coming in weaker than the long-term trend: however, 2024 revisions are much stronger. While Q4 earnings should be quite mixed, the 2024 outlook is more broadly positive. Over the next 5 trading days, 108 companies representing 38.3% of S&P 500’s market cap will report results, including Apple, Microsoft, Alphabet, Amazon, Meta, ExxonMobil, Mastercard, and Merck.

What to watch

• Monday: No major release
• Tuesday: Eurozone flash GDP estimates (Q4), EC business surveys (Jan.)
• Wednesday: China NBS manufacturing PMI (Jan.); France, Germany flash HICP (Jan.); US Employment Cost Index (Q4), ADP job report (Jan.), Initial jobless claims (Jan. 6), FOMC decision (Jan.), Quarterly Refunding Announcement (Q1); Brazil central bank decision
• Thursday: China Caixin manufacturing PMI (Jan.); Switzerland manufacturing PMI (Jan.); Sweden Riksbank decision (Jan.); Eurozone flash HICP (Jan.); UK BoE decision (Jan.); US manufacturing ISM (Jan.)
• Friday: US nonfarm payrolls report (Jan.), durable goods orders (Dec), UoM consumer survey (Jan.)