2024 Weekly Update

Market update

The S&P 500 closed the week at 5,026.61, +1.37% higher. The Dow Jones closed at 38,671.69, +0.04%, with the Nasdaq higher by +2.31%. The volatility index VIX closed the week at 12.93 down from 13.85. The Euro Stoxx 600 gained +0.19%.

The 10-year UST closed at 4.18% up from 4.02% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -122bps. US Corporate Bond spreads: Investment Grade tightened 4bps at 164bps and High Yield tightened 22bps at 358bps. German 10-year Bunds yield closed at +2.38% up from +2.24% a week before. In Europe, Corporate Investment Grade spreads tightened 2bps at 142bps and High Yield spreads tightened 22bps to 361bps.

The US Dollar Index (DXY) appreciated +0.18% last week and closed at 104.11. The Euro closed at 1.0784 (-0.04%); the Yen depreciated -0.61%, closing at 149.29 and the Swiss Franc depreciated -0.91%, closing at 0.8747. Gold closed at$2,024.26 depreciating -0.76%. Oil was higher, Brent closed at $82.19 (+6.28%) and WTI at $76.84 (+6.31%).

Macroeconomy

US CPI

Last week several CPI revisions were published. Short-term revisions were pretty benign. The CPI rose 0.2% in Dec. instead of 0.3% as reported. Data for November was revised up to show the CPI increasing 0.2% rather than 0.1% as previously estimated. At the same time, new seasonal adjustment factors came out, which will be used to revise the last 5 years of CPI inflation data. Last year, they showed that inflation was proving more persistent than thought in late-2022 (lower in H1 22), with the 3-month annualized rate of core CPI revised up from 3.14% to 4.25%. So that complicated the near-term inflation picture for the Fed whose members are watching closely. Tomorrow Tuesday, we will get updated CPI data. Analysts expect headline CPI at +0.2% to undershoot core at +0.3%. This would equate to core y-o-y CPI inflation falling two-tenths to 3.7%, while that for headline would fall by four-tenths to 2.9%. The three-month annualized rate would rise two-tenths to3.5% while the six-month annualized rate would tick up a tenth to 3.3% largely due to base effects.

Fedspeak

Fed Chair Jerome Powell appeared at ‘60 Minutes’. He said that the “danger of moving too soon is that the job’s not quite done”. Moreover, the interview was recorded before the jobs report came out, so it’s reasonable to assume that things may have got a bit more hawkish since. We heard from other Fed members during the week. Cleveland Fed President Mester struck a cautious tone, saying that “It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%”. Philadelphia Fed President Harker struck an optimistic tone, saying that the Fed’s approach “has put us on the path to a soft landing” although he did not comment on rate cut prospects. Minneapolis Fed President Kashkari said that he thought 2-3 cuts would be appropriate for 2024, and that “We’re not looking for better inflation data, we’re just looking for additional inflation data that is also at around this 2% level”. So he said that if they “see a few more months of that data, I think that will give us a lot of confidence.” Later on, Governor Kugler said that she was “pleased by the progress on inflation, and optimistic it will continue”. And after that, Boston Fed President Collins said that “it will likely become appropriate to begin easing policy restraint later this year. ”Finally, Richmond Fed President Barkin said he was “very supportive of being patient to get to where we need to get”.

Other Central Banks

Bank of Japan (BoJ) Deputy Governor Uchida said that even if they ended negative interest rates “it is hard to imagine apath in which it would then keep raising the interest rate rapidly”. So that indicated a fairly dovish path. Elsewhere, the Reserve Bank of Australia Governor Michelle Bullock signaled that interest rates will be cut before inflation falls to its 2-3% inflation target amid emerging signs that household spending is slowing and price pressures are easing.

US data

The US ISM services index surprised on the upside at 53.4 (vs. 52.0 expected). The prices paid subcomponent surged to an 11-month high of 64.0 (vs. 56.7 expected), which added a warning that inflationary pressures are still around. The Fed Senior Loan Officer's survey (SLOOS) showed the recent sharp tightening of credit conditions moderating in Q4, with credit standards for commercial & industrial loans tightening at their slowest pace in seven quarters. Credit conditions remain tight but the downside risks for activity suggested by the SLOOS are easing. Lastly, the Atlanta Federal Reserve's GDPNow estimate for Q1 growth was revised upwards to 3.4% from an initial 3.0%, signaling a strong US growth backdrop.

Highlights

S&P 500…0

The S&P 500 hit another all-time high, finishing Friday above the 5000 level for the first time. This was thanks to a +1.37% gain over the week, the 5th consecutive week of gains for the index and the 14th out of last 15 weeks. The rally was still relatively concentrated. The equalweighted S&P 500 increased a more modest +0.47% and it was the IT sector (+1.50% in the S&P), including the Magnificent 7 (+2.98%), that drove last week’s rally again. Semiconductors were the most prominent outperformer, as the Phil. Semiconductor Index jumped +5.32% following strong results from chipmaker ARM and an announcement by Nvidia (in talks with top AI firm OpenAI on designing specialized chips). US regional banks recovered on Friday, with the regional banking KBW index up +1.85% (still -1.31% lower on the week) as New York Community Bank (NYCB) rose by +16.9% on news that its management had bought additional shares. NYCB was -18.9% lower on the week, drawing further attention to turmoil in the CRE market. In Europe, the STOXX 600 rose a more modest +0.19% last week.

Earnings season

As of Friday, 77.1% of the S&P 500's market cap had reported. 4Q expectations are for revenues to grow 3.4% and EPS by 9.1%. Earnings are beating estimates by 7.2% in aggregate, with 72% of companies topping projections. EPS is on pace for 10.8%, assuming the current beat rate for the rest of the season. Firms beating on both revenues and EPS are outperforming the market by 1.7% vs. an historical average of 1.7%, while ones missing on both are underperforming by -4.2% vs. -3.1%. This week, 62 companies representing 6.2% of the S&P 500's market cap will report results, including Coca-Cola, Airbnb, Marriott International, Cisco Systems, Kraft Heinz, or Deere.

On rates

With data pointing to a more robust US economy, investors reduced expectations of rate cuts in 2024, driving the expected rate for the December meeting up +12.1bps last week to 4.20%. It was a similar story in Europe, as investors dialed back expectations of ECB cuts by -13.0 bps as comments from central bank speakers pointed to caution on the timing and pace of rate cuts. Adding to the lingering inflation concerns, Brent crude oil prices surged +6.28% to $82.19/bbl after Israel rejected a ceasefire offer from Hamas, with news that the US may be looking to strengthen enforcement of sanctions against Iranian oil adding to the upside. Against this backdrop, 10yr yields rose +15.4bps last week to 4.18%, its joint highest close since the December FOMC meeting, and 2yr yields by +11.6bps. In Europe, 10yr bund yields rose +14.0bps.

What to watch

• Monday: US NY Fed 1-yr inflation expectations (Jan.), Monthly budget statement; Japan PPI (Jan.)
• Tuesday: US CPI, NFIB small business optimism (Jan.); Germany, Eurozone Zew survey (Feb.); Germany current account (Dec.); France UR (Q4)
• Wednesday: UK CPI, RPI, PPI (Jan.); Japan GDP (Q4); Eurozone GDP (Q4), Employment, Industrial production (Dec.)
• Thursday: US retail sales, Ind. production (Jan.), Phil. Fed business outlook, Empire manuf. index (Feb.); UK GDP (Q4); Eurozone trade balance (Dec.)
• Friday: US PPI, housing starts, building permits (Jan.), University of Michigan, NY Fed services business activity (Feb.); UK retail sales (Jan.)