2024 Weekly Update

Market update

The S&P 500 closed the week at 5,117.09, -0.13% lower. The Dow Jones closed at 38,714.77, -0.02%, with the Nasdaq lower by -0.70%. The volatility index VIX closed the week at 14.41 down from 14.74. The Euro Stoxx 600 slipped -0.20%.

The 10-year UST closed at 4.31% up from 4.08% 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 6bps at 161bps and High Yield tightened 12bps at 341bps. German 10-year Bunds yield closed at +2.44% up from +2.27% a week before. In Europe, Corporate Investment Grade spreads tightened 10bps at 124bps and High Yield spreads tightened 21bps to 331bps.

The US Dollar Index (DXY) appreciated +0.70% last week and closed at 103.43. The Euro closed at 1.0889 (-0.46%); the Yen depreciated -1.35%, closing at 149.04 and the Swiss Franc depreciated -0.76%, closing at 0.8838. Gold closed at $2,155.90 depreciating -1.06%. Oil was higher, Brent closed at $85.34 (+3.97%) and WTI at $81.04 (+3.88%).

Macroeconomy

CPI

Feb. US headline CPI came in at a 6-month high of +0.44%, with the y-o-y measure ticked up a bit to +3.2% (vs. +3.1% expected). Core CPI was at +0.36%, with annual core CPI also above expectations at +3.8% (vs. +3.7% expected). Some of the blame was placed on shelter inflation, which was up by a monthly +0.43%. Analyzing the core CPI on a 3-month annualized basis, it rose to +4.2%, more persistent than expected. Apart from the post-Covid inflation, 3m core CPI hasn’t been that high since 1991. Alongside that, there was evidence that the inflation was coming from the stickier categories in the consumer basket. In fact, the Atlanta Fed’s sticky CPI series is now up by +5.1% on a 3m annualized basis, the fastest it’s been since April 2023. So, the concern for markets will be that inflation is showing some signs of rebounding, or at the very least stabilizing at above-target levels.

PPI

Feb. US headline PPI came in at +0.6% (vs. +0.3% expected), pushing the y-o-y measure up to +1.6% (vs. +1.2% expected). The measure excluding food, energy and trade services was up +0.4% (vs. +0.3% expected). So, the release echoed the upside surprise in Tuesday’s CPI print, and led to growing concern that inflation was getting stuck above target levels. At the same time, that inflation narrative got further momentum from the latest uptick in oil prices. Those inflation concerns were heightened by the New York Fed’s latest Survey of Consumer Expectations, which showed medium- and long-term expectations rising again in February. In particular, the 5yr inflation expectation was up to a 6-month high of +2.9%, which was a reversal from the downward trend over the preceding months. Separately, there were also signs of a weaker labor market, as the mean probability of losing one’s job in the next year was up to 14.5%, which was the highest since April 2021. Moreover, the mean probability of finding a job in 3 months if one lost their job was down to 52.5%, again the lowest since April 2021. Other data was not entirely hawkish, with US retail sales disappointing in February. Headline retail sales were only up by +0.6% in February (vs. +0.8% expected) with the previous month revised down to show a larger -1.1% decline. And the retail control group was flat in February (vs. +0.4% exp.) after falling by -0.3% in January. This means the 3-month change in retail control has turned negative for the first time since last April.

Central banks preview

In the US, the updated dot plot and inflation projections will be key elements of Wednesday’s FOMC (Federal Open Market Committee) meeting. While the market expects the FOMC to leave rates on hold, Chair Powell’s take on the recent inflation data will be under scrutiny. In Switzerland, with inflation surprising on the downside and being entirely domestically driven, the Swiss National Bank (SNB) no longer needs to strengthen the currency to reduce imported price pressures. Although the SNB is more likely to wait until June to lower its policy rate, a March cut cannot be ruled out. In Japan, wage growth shows positive signs after encouraging Shunto wage negotiation results. While talks for most smaller companies are expected to conclude by the end of the month, the country’s largest union group, Rengo, announced the highest pay hikes in 33 years. This added to expectations that the Bank of Japan (BOJ) will end its Negative Interest Rate Policy (NIRP) and further relax its Yield Curve Control (YCC) at the BOJ’s March Meeting that ends Tuesday. Lastly, the Reserve Bank of Australia (RBA) is expected to keep rates unchanged at 4.35% as inflation continues to decline but remains at elevated levels.

China

Chinese inflation rebounded in February. Headline inflation came in at +0.7% y-o-y, up from -0.8% in January, and core inflation came in at +1.2%, up from +0.4% in January. The rebound was in line with expectations, although the magnitude still surprised somewhat on the upside. There are two drivers behind the rebound. The first is the base-effect distortion caused by the shifting dates of Chinese New Year. In January, the base effect exaggerated the decline in inflation, and in February the base effect worked in the other direction. The second driver is the improvement in consumption, especially for services, during the Chinese New Year holidays. Prices for services, especially related to tourism rose sharply, consistent with the consumption recovery we observed earlier. Looking forward, as the holiday impact disappears, there should be some pullback in price momentum.

Highlights

On rates

We saw rates selling off last week, with 10yr Treasury yields (+23bps) up to 4.31% as concerns mounted about stubborn inflation. The main driver was a strong US PPI report. Alongside that, oil prices closed at their highest level since November, which added to fears that inflation was still gathering momentum. Brent crude oil prices rose to their highest level since November. The moves came amid Ukrainian drone strikes against Russian oil refineries and with data showing that US crude stockpiles declined for the first time in seven weeks. Higher oil prices have been filtering through to consumer prices since the start of the year, and the AAA’s measure of US daily gasoline prices has already risen from $3.110 per gallon at the end of 2023 to $3.396 per gallon. And on top of that, there was growing anticipation that the Bank of Japan would end their negative interest rate policy at this week’s meeting, which added to the upward pressure on global yields. For markets, the big question is what this means for rate cuts. Up to now, futures had been focused on June as the most likely timing for the Fed’s first cut. But this week’s releases have led to growing doubts about that. For example, futures are now pricing in roughly a one-in-three likelihood that the Fed won’t cut at all by June. And for 2024, just 74bps of cuts are priced in by the December meeting, which is the fewest so far this year. That’s a big turnaround from the start of the year, when 158bps of cuts were expected by December, and the first cut was fully priced in by March. Indeed, this pattern of pricing a dovish pivot has happened at least 7 times now in this cycle, and on the previous 6 it was followed by even more hawkish outcomes.

What to watch

• Monday: Euro area CPI (Feb. Final)
• Tuesday: Japan Industrial Production (Jan.); Japan BoJ Policy Rate & 10y JGB Target; German ZEW (Mar.); US Housing Starts (Feb.)
• Wednesday: UK CPI (Feb.); US FOMC Decision
• Thursday: PMI Japan, France, Germany, Euro area, UK (Mar.); UK BoE Rates; Switzerland SNB Decision; US Home Sales
• Friday: Germany IFO (Mar.)