2024 Weekly Update

Market update

The S&P 500 closed the week at 5,137.08, +1.33% higher. The Dow Jones closed at 39,087.38, -0.11%, with the Nasdaq higher by +1.74%. The volatility index VIX closed the week at 13.11 down from 13.75. The Euro Stoxx 600 rose +0.19%.

The 10-year UST closed at 4.18% down from 4.25% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -120bps. US Corporate Bond spreads: Investment Grade widened 8bps at 166bps and High Yield widened 8bps at 350bps. German 10-year Bunds yield closed at +2.41% up from +2.36% a week before. In Europe, Corporate Investment Grade spreads widened 2bps at 135bps and High Yield spreads widened 6bps to 340bps.

The US Dollar Index (DXY) depreciated -0.07% last week and closed at 103.86. The Euro closed at 1.0837 (+0.15%); the Yen appreciated +0.26%, closing at 150.12 and the Swiss Franc depreciated -0.28%, closing at 0.8834. Gold closed at $2,082.92 appreciating +2.33%. Oil was higher, Brent closed at $83.55 (+2.36%) and WTI at $79.97 (+4.55%).

Macroeconomy

Personal Consumption Expenditures

The Jan. PCE inflation report showed headline PCE running at a monthly +0.3% as expected, which took the y-o-y measure down to 2.4%, and its lowest since February 2021. Core PCE was running above that, at a 12-month high of +0.42%, which was in line with the +0.4% expected by the consensus. The report added to signs that inflation was still lingering above target, and some of the 6-month measures (which had previously pointed to inflation being back at target) were no longer looking as favorable. For instance, core PCE had been running at +1.9% on a 6m annualized basis, but after this January report, it was up to +2.5% again. Likewise, headline PCE rose from +2.1% to +2.5% on a 6m basis. Interestingly outside the pandemic period, and the month after 9/11, the monthly core print of 0.42% was the highest since the early 1990s. With this, short-term US inflation expectations have continued to move higher. In particular, the US 2yr breakeven was up to finish the week at 2.79%, the highest since last March, and the 2yr zero-coupon inflation swap reached its highest since October at 2.445%. This comes as the recent uptick in oil prices continues to filter through to the real economy, with US gasoline prices up to a 3-month high of $3.319 per gallon on Wednesday.

Central bank speakers

In the US, Boston Fed President Collins said that it “will likely become appropriate to begin easing policy later this year”, but also that “I want to see more evidence of a sustained trajectory to price stability”. Separately, New York Fed President Williams said that they still had “a ways to go on the journey to sustained 2% inflation”. Meanwhile at the European ECB, we heard from Slovakia’s Kazimir, who said in a Reuters interview that for a rate cut, “June would be my preferred date, April would surprise me and March is a no go”. Lithuania’s Simkus made similar comments, saying that “June is really the month to consider the rate cut”. And later in the evening, Germany’s Nagel said that "we can’t make any mistakes in the final stretch of the journey”, suggesting it would be “fatal” if rates were eased too early only for inflation to rebound. For the Fed, investors still expect that June is the most likely meeting for a cut, with futures pricing in a 61% chance of a cut by June. In Europe, investors are currently pricing a June rate cut with a 70% probability.

ECB

The Governing Council’s (GC) assessment of the new staff macroeconomic projections will be the highlight of this Thursday’s ECB meeting. The GDP and inflation projections are likely to be revised downwards (due to downside surprises to the December staff projections and the fall in electricity and gas prices). The stance is likely to remain broadly neutral, with balanced communication. An easing bias is possible if core inflation projections are revised down by a tenth to 2% in 2026. The market still expects June as the most likely date for a first rate cut, with a total of 100 bps of cuts priced this year, with the German reference rate at 3% by the end of the year. Last week, German inflation was down to +2.7% on the EU-harmonized measure, whilst in France it was down to +3.1%, its lowest since September 2021. Both were in line with consensus, while Spain’s print was a touch above (+2.9% vs +2.8% exp.). In the Euro area, flash inflation for February came in hotter-than-expected. Headline HICP slowed to 2.6% y-o-y (just above the 2.5% expected), while core saw a larger upside surprise at 3.1% (vs 2.9% expected).

Inflation in Japan

Japanese inflation continued to moderate in January. Core inflation (all items excluding fresh food) came in at 2.0% (exactly at the BoJ target), down from 2.3% in December 2023 and the “new core” inflation (all items excluding fresh food and energy) came in at 3.5%, down from 3.7% in the previous month. The decline in inflation was not just due to base-effect as in most part of last year. Instead, the underlying indices seem to be flattening in recent months. At the same time, the BoJ Governor Kazuo Ueda stated that he is still not confident the nation can sustainably attain the central bank's 2% inflation target while stressing the need to see the outcome of wage negotiations currently taking place, for confirmation of a positive wage-inflation cycle. He seems to be wanting to temper speculation that the BoJ could move as early as this month giving the BoJ some optionality. Lastly, BoJ’s Hajime Takata said that “my view is that the price target is finally coming into sight”. The likelihood of BOJ exiting its negative rate policy by April has risen to about 81%.

China PMI

Early morning data showed that China’s official manufacturing PMI contracted for the fifth straight month in February but was broadly in line at 49.1 (vs. 49.0 expected) versus the 49.2 seen in January. Meanwhile, the official non-manufacturing PMI grew more than expected to 51.4 in February after a 50.7 reading in January. Wit this, China's composite PMI remained steady at 50.9 in February.

Highlights

Earnings season

The Q4 earnings season is in its final stages, with 93% of companies having reported in the US, and nearly 70% having reported in Europe. EPS growth in the US was sequentially higher at +8% y-o-y. The bulk of this strong showing in the US can be attributed to the Magnificent 7 stocks. Excluding this group, S&P500 EPS growth is coming in at -2% y-o-y. In Europe, EPS growth was sequentially lower vs Q3 at -11% y-o-y. In terms of consensus projections, US companies on aggregate strongly beat expectations, by 7%, while European companies have disappointed by 2%. Topline delivery is mixed across regions: revenue growth in the US is tracking at +4% y/y, while in Europe revenue growth is at -6% y-o-y. At a sector level, commodity sectors have had another dismal quarter in all regions, and are particularly a drag on European earnings: Ex-Energy EPS growth in Europe is flat on a y-o-y basis. European Cyclical sectors are also faring poorly, with Industrials, Materials and Discretionary printing negative EPS growth. In the US, nearly all of the earnings growth can be attributed to Tech, Communication Services and Discretionary. Looking ahead to 2024 full year outlooks, a much smaller proportion of US companies are raising EPS guidance this quarter, well below the historical median.

What to watch

• Monday: Japan Tokyo CPI (Feb.); Switzerland CPI (Feb.)
• Tuesday: China 2024 annual NPC meeting; Eurozone, UK PMI services (Feb.); US ISM services (Feb.)
• Wednesday: China NBS manuf. PMI (Jan.); US ADP job report (Feb.); US JOLTS (Jan.); US Powell testimony before the House
• Thursday: China trade balance (Feb.); Germany factory orders (Jan.); Eurozone ECB decision (Mar.); US: Powell testimony before the Senate; US jobless claims
• Friday: Germany IP (Jan.); Euro area final GDP (Q4); US nonfarm payrolls report (Jan.)