2024 Weekly Update

Market update

The S&P 500 closed the week at 5,088.80, +1.17% higher. The Dow Jones closed at 39,131.53, +0.92%, with the Nasdaq higher by +0.57%. The volatility index VIX closed the week at 13.75 down from 14.24. The Euro Stoxx 600 surged +1.59%.

The 10-year UST closed at 4.25% down from 4.28% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -117bps. US Corporate Bond spreads: Investment Grade tightened 4bps at 158bps and High Yield tightened 15bps at 342bps. German 10-year Bunds yield closed at +2.36% down from +2.40% a week before. In Europe, Corporate Investment Grade spreads tightened 6bps at 133bps and High Yield spreads tightened 15bps to 334bps.

The US Dollar Index (DXY) depreciated -0.33% last week and closed at 103.94. The Euro closed at 1.0821 (+0.41%); the Yen depreciated -0.20%, closing at 150.51 and the Swiss Franc depreciated -0.03%, closing at 0.8809. Gold closed at $2,035.40 depreciating +1.08%. Oil was lower, Brent closed at $81.62 (-2.22%) and WTI at $76.49 (-3.41%).

Macroeconomy

FOMC minutes

The FOMC minutes reinforced the narrative that the Fed was in no rush to ease policy. According to the minutes, “most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%”, while “several participants mentioned the risk that financial conditions were or could become less restrictive than appropriate “. Meanwhile on Quantitative Tightening (QT), the minutes confirmed plans to begin in-depth balance sheet discussions at the March meeting, though this came with a view “to guide an eventual decision to slow the pace of runoff”, so not just suggesting that a change on QT is imminent.

Fedspeak

Fed speakers continued to urge caution regarding Fed cuts with Vice Chair Jefferson warning of the risk of “easing too much on improving inflation” after the January “CPI highlighted disinflation is likely to be bumpy.” He still said that it is “likely appropriate to cut later this year” but it was a slightly hawkish message from someone around the center of the FOMC. Philadelphia Fed president Harker made some mixed comments, saying he “would caution anyone from looking for (rates easing) right now and right away” but later suggesting that cuts could come within “a couple of meetings”. Later on, we heard a patient tone from Governor Waller, who noted that there was “no great urgency” to ease policy, as well as from Minneapolis Fed President Kashkari, who said “we still have some work to do” on inflation. Richmond Fed President Barkin said in an interview (recorded on Tuesday) that “You do worry that when the goods price deflation cycle ends, you’re going to be left with shelter and services higher than you like it”.

ECB

The publication of the ECB’s January meeting accounts showed officials were of the view that the risk of cutting rates too early was the greater danger relative to holding them steady, particularly with the limited indications of a wage turnaround. This signal of patience came even as there was “increased confidence” that inflation would come back to target and with the accounts flagging the likely lowering of the ECB’s inflation forecast at the March meeting. Later, relatively dovish ECB commentary on Friday saw markets raise their expectations of rate cuts. ECB President Lagarde stated slower pay growth in Q4 was “encouraging”, although she emphasized the importance of upcoming negotiations in Q1.

Global central banks

Canadian headline inflation down to +2.9% (vs. +3.3% expected), and core inflation also falling led to growing expectations that the Bank of Canada would soon be able to cut rates. Indeed, the chance of a rate cut by June surged from 58% on Monday to 84% by the close on Tuesday and yields on 10yr Canadian government bonds fell -7.1bps on the announcement. The minutes of the Reserve Bank of Australia’s recent meeting indicated that the central bank still remains inclined towards hiking interest rates further as it is not sufficiently confident that inflation is on track to return to its target range within the next couple of years. Lastly, Swedish CPI print for January showed a larger-than-expected increase to +5.4% (vs. +5.0% expected). That led to growing doubts about how soon the Riksbank would be cutting rates, and added to fears that the global inflation path would still be bumpy this year.

PMIs

The US composite PMI modestly fell 0.6 points to 51.4 (vs 51.8 expected), driven by a fall in the services component to 51.3 (vs 52.3 expected). The manufacturing component rose to 51.5 (vs 50.7 expected). In Europe, preliminary February PMIs saw the composite rise 1pt to 48.9 (vs 48.4 expected). This puts the index at an 8-month high, with the overall Euro Area growth outweighing a slump in German manufacturing. This was led by the services PMI, which rose to 50.0 (vs 48.8 expected), its first time out of contractionary territory since July.

Highlights

On rates

The strong equity performance and hawkish Fedspeak saw investors dial down expectations of rate cuts last week. The amount of Fed cuts expected by December fell by -8.4bps last week to 82.2bps. This saw 2yr yields rise +4.9bps last week. 10yr Treasuries were lower over the week by -3.2bps. In Europe, we saw a slight contrast as relatively dovish ECB commentary on Friday saw markets raise their expectations of rate cuts. The amount of cuts expected by the June meeting rise by +3.1bps to 28bps (though still down from 31bps a week earlier). On the other hand, longer-term bonds saw a similar rally as the US, with 10yr bund yields down -4.0bps over the week.

Earnings season

Over 80% of S&P500 companies and 55% of Stoxx600 companies have now reported Q4 results. EPS growth for the quarter is tracking at +7% y-o-y in the US, and -11% y-o-y in Europe. On aggregate, US companies strongly beat expectations, with EPS surprise factor at +8%, while European companies have disappointed vs consensus expectations by 2%. In the US, 77% of S&P500 companies that have reported beat EPS estimates. With the exception of Tesla, Magnificent 7 stocks have had another stellar quarter: Communication Services, Tech and Discretionary are the largest contributors to Q4 EPS growth. Excluding Magnificent 7, S&P500 EPS growth stands at -4% y-o-y for the quarter. On the other side, Commodity sectors and Healthcare are weaker. Topline growth is coming in at +4% y-o-y, surprising positively by 1%. Also, looking ahead to 2024 full year outlooks, we note that a much smaller proportion of US companies are raising EPS guidance this quarter, well below the historical median. In Europe, of the Stoxx600 companies that have reported so far, 52% beat EPS estimates. Q4 EPS growth is coming in at -11% y-o-y, surprising negatively by 2%. Commodity sectors and Industrials are the biggest drag to overall earnings, where ex- Energy EPS growth stands at +1% y-o-y. Revenue growth is printing at -7% y-o-y, surprising positively by 1%. In Japan, 55% of Topix companies beat EPS estimates, with overall EPS growth at +10% y-o-y. Revenue growth is at +2% y-o-y, and 50% of companies are beating sales estimates.

What to watch

• Monday: US New Home Sales (Jan.)
• Tuesday: Japan CPI (Jan.); Euro zone Money Supply M3 (Jan.)
• Wednesday: US GDP (Q4), Pers. Consumption (Q4), Core PCE (Q4)
• Thursday: Japan Ind. Production (Jan.); France CPI (Feb.), GDP (Q4F)
• Friday: Germany CPI (Feb.); US Personal Income & Spend (Jan.); US Jobless Claims (Feb. 24)