2024 Weekly Update

Market update

The S&P 500 closed the week at 5,123.69, -0.26% lower. The Dow Jones closed at 38,722.69, -0.93%, with the Nasdaq lower by -1.17%. The volatility index VIX closed the week at 14.74 up from 13.11. The Euro Stoxx 600 rose +2.08%.

The 10-year UST closed at 4.08% down from 4.18% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -132bps. US Corporate Bond spreads: Investment Grade widened 1bp at 167bps and High Yield widened 3bps at 353bps. German 10-year Bunds yield closed at +2.27% down from +2.41% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 134bps and High Yield spreads widened 12bps to 352bps.

The US Dollar Index (DXY) depreciated -1.11% last week and closed at 102.71. The Euro closed at 1.0939 (+0.94%); the Yen appreciated +2.04%, closing at 147.06 and the Swiss Franc appreciated +0.71%, closing at 0.8771. Gold closed at $2,178.95 appreciating +4.61%. Oil was lower, Brent closed at $82.08 (-1.76%) and WTI at $78.01 (-2.45%).

Macroeconomy

Jobs report

The Feb. jobs report was mixed. According to the Establishment survey, the US economy added 275k jobs in Feb., above the 200k forecast. This compares to the Household survey which painted a different picture, with the number of employed people falling 184k. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing. However, there were large negative revisions to the prior months - employment in December and January combined is 167k lower than previously reported. The unemployment rate jumped to 3.9%, up from 3.7% in Jan. (and ahead of the 3.7% forecast) which was driven by the Household survey employment decline. The participation rate held steady at 62.5% (compared to expectations for 62.6%). Average hourly earnings advanced only 0.1% m-o-m (vs. consensus at +0.2% and down from +0.5% in Jan.) and rose 4.3% y-o-y (inline expectations and down from +4.4% in Jan). Average weekly earnings rose 3.67% y-o-y, less than the 4.3% hourly wage rise (as the workweek length of 34.3 hours, while up from 34.1 in Jan., was down from 34.5 in Feb. 2023).

Powell speech

Speaking to the Senate Banking Committee, the Fed chair suggested the FOMC was “not far from” the confidence it needed “to begin to dial back the level of restriction”. This was in line with recent signals that the Fed were still planning to cut rates in 2024. However, Powell also cautioned that “ongoing progress toward our 2% inflation objective is not assured”, and that the FOMC “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%”. So, Powell continued to validate expectations for rate cuts this year but maintained that the Fed wanted more evidence of inflation being durably back at target. Later, Cleveland Fed President Mester struck a measured tone affirming expectations of rate cuts later this year but saying that “the bigger mistake would be to move rates down too soon or too quickly”.

ECB

ECB left rates unchanged, several aspects suggested the window for rate cuts was coming into view. For instance, its latest inflation projections were revised downwards, with headline inflation seen at 2.3% this year, 2.0% in 2025, and 1.9% in 2026, while core inflation is expected at 2.6% this year, 2.1% in 2025 and 2.0% in 2026. So, in a couple of years the ECB is pointing to core being back at target and headline being slightly underneath. Alongside that, the near-term growth forecast was revised down, with 2024 lowered by two-tenths from December to 0.6%. In President Lagarde’s comments, there was also something of a steer towards June, saying that “We will know a little more in April, but we will know a lot more in June”. Markets continue to see June as the likely starting point for cuts, while noting that Lagarde’s tone gave the impression that the ECB wants to move slowly through the easing cycle.

Japan

Inflation in Tokyo reaccelerated, advancing +2.6% y-o-y in Feb. (vs. +2.5% expected) as against a revised rise of +1.8% the previous month. Core inflation rose from an upwardly revised +1.8% y-o-y to +2.5% y-o-y in Feb., in-line with the market consensus. Japanese wage growth rose to +2.0% y-o-y in January (vs. +1.2% expected), which was the fastest since June, and added to expectations that the Bank of Japan would end their negative interest rate policy soon. According to media reports, in the on-going Shunto wage negotiation, unions have requested wage growth well above 5%, notably higher than analysts’ expectations. According to overnight index swaps, investors are now pricing in an 89% chance that they’ll adjust their policy by the April meeting, which is the highest that’s been since December. Separately, Japan’s services PMI was finalized at 52.9 in Feb., edging down from 53.1 but staying in expansionary territory for the 18th month in a row. The composite PMI was finalized at 50.6, down from 51.5.

China

As result of the National People's Congress, the nation has set its GDP growth target at 5% for 2024. Premier Li Qiang pledged that China would remove restrictions for foreign investment in manufacturing while announcing the issuance of “ultra-long” special government bonds worth 1trillion yuan ($138.9 billion) for major projects. Other measures mentioned during the meeting included a 7.2% rise in defense spending, the biggest in five years. The announced fiscal measures remain largely unchanged from 2023, which do not seem to be sufficient to turn around the economy. To see a meaningful pickup in growth momentum, we need to see either a significant increase in government spending compared to last year, or a notable improvement in housing market activities compared to last year. Chinese exports and imports both increased in the first two months of the year. Exports grew by 7.1% y-o-y, beating consensus by a wide margin.

Highlights

On rates

In the US, markets increased the amount of rate cuts expected this year. The amount of Fed cuts expected by the December meeting increased by +3.6bps on the week to 95bps, though this did retreat after pricing in as much as 103bps shortly after the Friday payrolls release. The first 25bps cut is nearly fully priced by June at 92% - vs. 96% the day before and last week. The data flow combined with slightly dovish central bank commentary sent sovereign bond yields lower last week. Yields on 2yr Treasuries fell -5.6bps, while 10yr yields fell -10.6bps to 4.08%, their lowest level in over a month. Over in Europe, investors dialed back the prospect of an April cut, which now stands at just 17%, whereas the prospect of a cut by June was largely stable at around 90%. So, there’s a pretty solid conviction that June is now most likely, and that’s the same month that markets are expecting the Fed’s first rate cuts as well. Yields also moved lower in Europe following the ECB decision last Thursday, with 10yr bund yields falling -14.6bps.

What to watch

• Monday: China National People’s Congress annual session for the top legislature concludes in Beijing
• Tuesday: Japan PPI (Feb.); US CPI (Feb.)
• Wednesday: no major events
• Thursday: US Retail Sales (Feb.), PPI (Feb.)
• Friday: US Empire Manufacturing (Mar.), Industrial Production (Feb.), Univ. of Michigan Sentiment (Mar., prel.); Russia presidential election begins, with voting continuing until Sunday