2024 Weekly Update

Market update

The S&P 500 closed the week at 4,958.61, +1.38% higher. The Dow Jones closed at 38,654.42, +1.43%, with the Nasdaq higher by +1.12%. The volatility index VIX closed the week at 13.85 up from 13.26. The Euro Stoxx 600 slipped -0.72%.

The 10-year UST closed at 4.02% down from 4.14% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -136bps. US Corporate Bond spreads: Investment Grade widened 7bps at 168bps and High Yield widened 8bps at 380bps. German 10-year Bunds yield closed at +2.24% down from +2.30% a week before. In Europe, Corporate Investment Grade spreads widened 1bp at 144bps and High Yield spreads widened 15bps to 383bps.

The US Dollar Index (DXY) appreciated +0.47% last week and closed at 103.92. The Euro closed at 1.0788 (-0.60%); the Yen depreciated -0.16%, closing at 148.38 and the Swiss Franc depreciated -0.30%, closing at 0.8668. Gold closed at $2,039.76 appreciating +1.05%. Oil was lower, Brent closed at $77.33 (-7.44%) and WTI at $72.28 (-7.35%).

Macroeconomy

Jobs report

The US economy added 353k jobs in Jan. according to the Establishment survey, far above the forecast of 185k. Job gains occurred in professional and business services, health care, retail trade, and social assistance. Nov. and Dec. payrolls were revised up by 126k in the Establishment survey. According to the Household survey, the number of employed people dipped by 31k m-o-m. The unemployment rate held flat m-o-m at 3.7% (vs. expectations at 3.8%). The participation rate held steady m-o-m at 62.5% (vs. 62.6% forecasted). Average hourly wages were very hot at +4.5% (vs. consensus at +4.1%) and Nov. was revised up from +4.1% to +4.3%. The workweek shrank notably to 34.1 hours, down from 34.3 hours in Dec. (analysts anticipated 34.3 hours).

FOMC meeting

The Federal Reserve left the reference interest rate unchanged at 5.25%-5.50%, as widely expected. the FOMC made some important adjustments to their statement. They dropped their tightening bias, no longer talking about "the extent of any additional policy firming", but instead talking about "any adjustments to the target range for the federal funds rate”. However, there was still a more hawkish comment, as it said “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%", offering some gentle pushback on expectations of an imminent rate cut. In the press conference, Powell repeatedly reiterated he needs to get “greater confidence” on the disinflation path, even as it was accompanied by a positive take on the disinflation progress so far. Towards the end of the press conference Powell then delivered an explicit pushback against expectations of a March rate cut, saying that a March cut “is probably not the most likely case” and adding “I don’t think it is likely that the Committee will reach a level of confidence by the time of the March meeting”. Meanwhile on QT, Powell said that the FOMC planned to start “in-depth discussion on balance sheet issues” at the March meeting.

Bank of England

The Bank of England (BoE) held rates at 5.25% but removed the tightening bias. There is little ambiguity left over the BoE’s next move – it’s almost certainly going to be a cut – but they are in no rush. Similarly to Powell’s comments, Governor Bailey said that the BoE needed more evidence to be sure that inflation would fall and stay below 2%. The vote was split with one MPC member voting for a cut, six members for unchanged rates, and two members for a hike (a hawkish surprise on the margins, though coming from long-time hawks). More importantly, the conditional inflation forecasts were dovish.

European data

Euro area headline inflation (flash estimate) eased slightly to 2.8% y-o-y in Jan. from 2.9% in Dec. Meanwhile, core inflation also eased to annual rate of 3.3% in Jan. from 3.4% in Dec. Non-energy industrial goods inflation and food inflation eased in Jan., while services inflation was stable at 4.0% for the third month in a row. Euro area GDP was flat in Q4 2023, better than expectations. Country wise, upside surprises in Spain (+0.6% q-o-q, expected 0.2%, and up from 0.4% in Q3), Italy (+0.2% q-o-q, expected 0.0%, 0.1% in Q3) and Portugal (+0.8% q-o-q, expected 0.3%, -0.2% in Q3) were behind the euro area’s overall resilience, underlining their divergence with the much weaker performance of core euro area countries (France 0.0%, Germany -0.3% q-o-q).

Highlights

Rates reaction

Before the strong jobs report from Friday, the US bonds rally was likely driven by the concerns surrounding the US regional banks, specifically due to the announcement of unexpected increases in loss provisions for a commercial real estate portfolio by a US regional bank, New York Community Bancorp. This has highlighted again the vulnerability of commercial real estate due to high interest rates, leading to movements in the bond market. As a result, investors sought safety and showed renewed interest in US Treasury bonds. Additionally, short-covering on the long-end of the yield curve contributed to a decrease of approximately 25 basis points in the 10-year and 30-year US Treasury bond yields. Friday strong jobs report led to a sharp sell-off in US fixed income as 10yr yields rose +14.1bps. Investors responded by paring back expectations of Fed cuts in 2024, with the expected Fed rate for Dec. rising +21.2bps on Friday, and +9.6bps over the week. The pricing of a 25bps cut by the March meeting fell to 22%, down from 50% a week earlier and a still sizeable 38% as of Thursday despite Powell’s pushback against a March cut at Wednesday’s press conference. This sent 2yr Treasury yields +16.1bps higher on Friday, their largest rise since last March. 2yr yields were up a marginal +1.6bps over the week after their earlier decline amid renewed concerns over the US regional banking sector. 10yr yields were down -11.6bps over the week to 4.02%.

Earnings season

As of Friday, approximately 200 companies in the S&P 500 have reported results, with 62% reporting higher-than-expected EPS but weaker results compared to the previous quarter. Sales have shown a slight improvement, with 52% exceeding revenue expectations. Most sectors in the S&P 500 have surpassed expectations. Basic Resources and Energy performed well in terms of net income, while Technology and Automobile sectors excelled in sales. Personal Care and Consumer Products had the lowest net income surprise, while Utilities and Banks performed poorly in sales. Around 10% of the companies in the Stoxx Europe 600 index have reported results, with 45% showing positive net income surprises and only 30% beating sales expectations. Average surprises were negative for both net income and sales. In terms of guidance, 41 companies of the S&P 500 index have provided guidance for the first quarter. Overall, the guidance at the index level is nearly in line with the long-term average and less positive compared to the previous two quarters. The Technology sector has balanced guidance, while most companies in the Industrial sector have provided negative guidance. The number of companies offering guidance in other sectors is less significant.

What to watch

• Monday: China Caixin PMI (Jan.)
• Tuesday: Germany Factory Orders (Dec.); Eurozone Retail Sales (Dec.); Reserve Bank of Australia Policy Decision
• Wednesday: Germany Industrial Prod. (Dec.); US Trade Balance (Dec.); Switzerland Unemployment Rate (Jan.), Foreign Currency Reserves (Jan.)
• Thursday: US Initial Jobless Claims (Feb. 3); China PPI & CPI (Jan.); Reserve Bank of India Rate Decision
• Friday: China lunar New Year’s Eve - financial markets closed