2024 Weekly Update

Market update

The S&P 500 closed the week at 5,005.57, -0.42% lower. The Dow Jones closed at 38,627.99, -0.11%, with the Nasdaq lower by -1.34%. The volatility index VIX closed the week at 14.24 up from 12.93. The Euro Stoxx 600 surged +1.32%.

The 10-year UST closed at 4.28% up from 4.18% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -111bps. US Corporate Bond spreads: Investment Grade tightened 2bps at 162bps and High Yield tightened 1bp at 357bps. German 10-year Bunds yield closed at +2.40% up from +2.38% a week before. In Europe, Corporate Investment Grade spreads tightened 3bps at 139bps and High Yield spreads tightened 12bps to 349bps.

The US Dollar Index (DXY) appreciated +0.16% last week and closed at 104.28. The Euro closed at 1.0777 (-0.06%); the Yen depreciated -0.62%, closing at 150.21 and the Swiss Franc depreciated -0.67%, closing at 0.8806. Gold closed at $2,013.59 depreciating -0.53%. Oil was lower, Brent closed at $83.47 (+1.56%) and WTI at $79.19 (+3.06%).

Macroeconomy

Inflation

Jan. headline CPI came in at 0.3% m-o-m (vs 0.2% expected), with the y-o-y value at 3.1% (vs 2.9% expected). Core CPI, which excludes food and energy prices, rose 0.4% m-o-m (vs 0.3% expected), its highest value since last May. This brought the core CPI up to 3.9% y-o-y (vs 3.7% expected), reducing the already slim chances that the Fed will be lowering rates in the near-term. Shelter caught everyone by surprise and increased 0.6% in Jan., the largest factor in the monthly increase in the core index. If that was the only anomaly, the report might have been seen as a one-off, but we also saw ‘supercore inflation’, which covers core services ex housing, rise to 4.3% y-o-y, its highest level since last May and the largest monthly increase (+0.85%) since April 2022. So a major blow to the disinflation narrative in US services. The measure had been stalling at just under 4% in the last few months. Together with the strong nonfarm payrolls for January, this CPI report will give the Fed less confidence of sustainably reaching 2% inflation. On Friday, Jan. PPI (Producer prices) came in at 0.3% m-o-m (vs 0.1% expected), and 0.9% in y-o-y terms (vs 0.6% expected), exceeding expectations across every aggregate. Additionally, we had the University of Michigan’s inflation expectations for February, which saw both 1yr and 5-10yr inflation expectations beat estimates at 3.0% (vs 2.9% expected) and 2.9% (vs 2.8% expected), respectively. Lastly, the NY Fed inflation expectation report showed that 3-year inflation expectations fell to 2.35% (from 2.62%), its lowest level since 2013. 1-year inflation expectations were largely unchanged at 3.00% (previously 3.01%).

Consumer health check

Jan. Headline US retail sales missed to the downside, falling -0.8% m-o-m (vs -0.2% expected), while the Dec. reading was revised down from 0.6% to 0.4%. This is the weakest report since last March and showed a broad-based cooling with 9 of the 13 spending categories declining. Seasonal factors can sometimes lead to a steep fall in January after the end of the holiday season, but the details of this print and the Dec. revision were not suggestive of this. The retail control group, which excludes vehicles, gas, food services and building materials, and has the strongest correlation with the GDP number, also fell -0.4% (vs 0.2% expected), the first decline since last March. Moreover, retail control growth was revised lower for both Dec. (from +0.8% to +0.6%) and Nov. (from +0.5% to +0.2%). Interestingly, non-store retailers like Amazon accounted for most of the decline in retail control. The category had been a supportive force for retail spending in previous prints.

European forecast

The European commission updated its economic forecast. The recent autumn forecast projects GDP growth in 2023 at 0.6% in both the EU and the euro area. This is 0.2%. lower than projected in the summer and an even larger downward revision compared to the spring forecast, by 0.4%. Going forward, growth is expected to rebound mildly as consumption recovers with rising real wages, investment remains supportive and external demand picks up. EU GDP growth is forecast to improve to 1.3% in 2024, still below potential and a downward revision of 0.1% from summer. It is projected to gain further pace, to 1.7%, in 2025. In the euro area, GDP growth is forecast to be slightly lower, at 1.2% in 2024 and 1.6% in 2025. HICP inflation is estimated to have reached a two-year low in the euro area in Oct. and is projected to continue declining over the forecast horizon. In the EU, headline inflation is set to decrease from 6.5% in 2023 to 3.5% in 2024 and 2.4% in 2025. In the euro area, it is forecast to fall from 5.6% in 2023 to 3.2% in 2024 and 2.2% in 2025.

Highlights

On rates

The key theme was renewed concerns about persistent high US inflation after a red-hot CPI print on Tuesday was followed by another upside surprise in producer prices on Friday. Investors significantly dialed back the amount of rate cuts expected. The amount of Fed cuts expected by Dec. fell to as low as 80bps intra-day after the PPI print, though this was back to 90bps by the close (still down -22.3bps over the week and -5.8bps on Friday). So that’s nearly a full 25bps hike being taken out last week, with expected 2024 easing shrinking almost by half since a peak of 168bps on Jan. 12. This backdrop sent 10yr Treasury yields up +10.5bps on the week to 4.28%, their highest weekly close since late Nov. The more interest-rate sensitive 2yr yield jumped +16.1bps. Across the pond in Europe, the bond sell-off was more muted, but 10yr bund yields did reach their highest level since the end of Nov. at 2.40% (+2.1bp over the week). ECB’s Wunsch commented that there was “no big risk in waiting or not for data” in terms of deciding when to cut, as markets have already priced in future rate cuts which provide some easing for financial conditions even before a cutting cycle begins. He suggested there was not a “huge difference” whether to start rates cuts earlier and proceed gradually or “wait a bit more and then go faster”.

Earnings season

In the US, 78% of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is at +5% y-o-y, surprising positively by 8%. Crucially, the bulk of earnings growth can be attributed to Communication Services, Tech and Discretionary. If one were to exclude the Magnificent 7 results, EPS growth for the US is at -4% y-o-y. On the other side, Commodity sectors and Healthcare are weaker this quarter. Topline growth is coming in at +4% y-o-y, surprising positively by 1%. In Europe, of the Stoxx600 companies that have reported so far, 52% beat EPS estimates. Q4 EPS growth is coming in at -8% y-o-y, surprising negatively by 3%. Commodity sectors and Industrials are the biggest drag to overall earnings, where ex- Energy EPS growth stands at +4% y-o-y. Revenue growth is -6% y-o-y, surprising positively by 2%. In Japan, 55% of Topix companies beat EPS estimates, with overall EPS growth at +8% y-o-y. Revenue growth is at +3% y-o-y, and 50% of companies are beating sales estimates. In terms of guidance, 82 companies in the S&P500 have provided earnings per share (EPS) guidance for the first quarter of the current fiscal year. Out of these 82 companies, 57 have issued negative guidance, while 25 have issued positive guidance. The proportion of companies providing negative guidance is 70%, which exceeds the historical average of 64%. At the sector level, the Health Care, Consumer Staples, and Financials sectors have the highest proportion of negative guidance, with zero companies providing positive guidance. On the other hand, the Communication Services, Real Estate, and Utilities sectors have the lowest proportion of negative guidance.

What to watch

• Monday: Japan Core Machinery Orders (Dec.)
• Tuesday: US Leading Index (Jan.)
• Wednesday: US Mortgage Applications (Feb. 16)
• Thursday: Euro zone, France, Germany, UK, US PMI (Feb.)
• Friday: Germany GDP (Q4) & IFO (Feb.)