2024 Weekly Update

Market update

The S&P 500 closed the week at 5,204.34, -0.95% lower. The Dow Jones closed at 38,904.04, -2.27%, with the Nasdaq lower by -0.80%. The volatility index VIX closed the week at 16.03 up from 13.01. The Euro Stoxx 600 slipped -0.83%.

The 10-year UST closed at 4.40% up from 4.20% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -98bps. US Corporate Bond spreads: Investment Grade tightened 2bps at 157bps and High Yield widened 9bps at 340bps. German 10-year Bunds yield closed at +2.40% up from +2.30% a week before. In Europe, Corporate Investment Grade spreads tightened 6bps at 121bps and High Yield spreads widened 10bps to 363bps.

The US Dollar Index (DXY) depreciated -0.18% last week and closed at 104.30. The Euro closed at 1.0837 (+0.44%); the Yen depreciated -0.18%, closing at 151.62 and the Swiss Franc depreciated -0.04%, closing at 0.9018. Gold closed at $2,329.75 appreciating +4.48%. Oil was higher, Brent closed at $91.17 (+4.22%) and WTI at $86.91 (+4.50%).

Macroeconomy

Jobs report

In March, the US economy added 303k jobs according to the Establishment survey, higher than the forecast of +214k and above the 12-month average of 231k. Job gains occurred in health care, government, and construction. Establishment survey revisions were a small positive - employment in Jan. and Feb. combined is 22k higher than previously reported. The Household survey showed a large 498k m-o-m jump in the number of employed people. The unemployment rate ticked down to 3.8%, down 10bps from Feb. and in line with consensus. The participation rate jumped 20bps to 62.7%, higher than the consensus forecast of 62.6% (this participation rate jump prevented the unemployment rate from dropping even further). Hourly wages were in line with expectations, rising 4.1% y-o-y (vs. +4.3% in Feb.) and 0.3% m-o-m. Weekly earnings were about in line with the hourly rate, rising 4.1% y-o-y. The workweek was a bit longer at 34.4 hours, up from 34.3 in Feb. and ahead of the 34.3 consensus.

Fedspeak

It was a busy week of Fedspeak. Already on Good Friday, the Feb. core PCE deflator (+0.26% vs. +0.3% expected) remained elevated but eased considerably after the +0.45% Jan. print, with the annual print slowing by a tenth to 2.8%. Fed Chair Powell commented that the data were “pretty much in line with our expectations", while also noting that “we don't need to be in a hurry to cut”. On Tuesday, San Francisco Fed President Daly said that three cuts this year was “a very reasonable baseline” but that as of now “growth is going strong, so there’s really no urgency to adjust the rate”. Cleveland Fed President Mester also said she still saw three cuts in 2024 but that “it’s a close call” whether fewer cuts would be needed, and noting earlier that “at this point, I think the bigger risk would be to begin reducing the funds rate too early.” On Wednesday, Fed Chair Powell said that recent data didn’t “materially change the overall picture” and that on inflation “it is too soon to say whether the recent readings represent more than just a bump”. In addition, he reiterated that if “the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year.” He also said that “the job of sustainably restoring 2% inflation is not yet done”, and that “we do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%”. On Thursday, Minneapolis Fed President Kashkari, who described the Jan. and Feb. inflation prints as “a little bit concerning”, questioned whether rate cuts would need to happen at all if inflation did move sideways. Chicago Fed President Goolsbee suggested that the higher Jan. and Feb. inflation readings “should not knock us off the path back to target”, though he was watchful over the still elevated housing inflation. And Richmond Fed President Barkin said that “given a strong labor market, we have time for the clouds to clear before beginning the process of toggling rates down”.

Global PMIs

In the US, Manufacturing sentiment rose above 50 for the first time in 18 months, suggesting a tentative rebound. It was driven by new orders, production, and employment. However, prices paid increased sharply, raising concerns that the disinflation in goods prices will reverse. The ISM services declined and remains range bound at 51.4 (vs. 52.8 expected). The prices paid index fell to 53.4 (vs. 58.4 expected), its lowest since March 2020, suggesting room for further disinflation in services. In Europe, the final services and composite PMIs for March saw upward revisions vs. flash PMIs. The Euro Area composite PMI was up to 50.3 (vs. flash 49.9), marking its first time in expansionary territory in 10 months. In Germany, the composite PMI came at 47.7 (vs. flash 47.4), whilst France’s was at 48.3 (vs. flash 47.7). In the UK, the final composite PMI was down a tenth from the flash reading to 52.8. In China, the Caixin/S&P Global manufacturing PMI rose from 50.9 to 51.1 in March, with manufacturing activity expanding at its fastest pace in 13 months and corroborating the 11-month high in the official manufacturing PMI over the weekend. The Caixin composite PMI was up to a 10-month high of 52.7.

European Central Bank

The release of the accounts of the ECB’s March meeting were consistent with the ECB seeing June as the baseline for the first rate cut. The accounts noted that “while it was wise to await incoming data and evidence, the case for considering rate cuts was strengthening”, and pointed out that “the Governing Council would have significantly more data and information by the June meeting, especially on wage dynamics. By contrast, the new information available in time for the April meeting would be much more limited”. At the same time inflation is slowing. The flash CPI print for March saw headline CPI fall to +2.4% (vs. +2.5% expected), whilst core CPI fell to +2.9% (vs. +3.0% expected), which is its lowest since February 2022. Alongside that, Spanish central bank governor De Cos said “I think that today my central scenario is that June could actually be the first reduction in interest rates”. In terms of rate cut expectations, overnight index swaps are now pricing in 86bps of ECB cuts by the December meeting, which is more than the 62bps currently priced in by Fed Funds futures.

Switzerland data

CPI rose by 1% from March 2023, lowest level since Sept. 2021 and down from 1.2% in Feb. It was the 10th month that inflation came within the Swiss National Bank's 0-2% target range, and was lower than expectations at 1.3%. At the same time, unemployment rate stood at 2.4% in March, the same as in February. In the corresponding month last year, the jobless rate was 2.0%. The youth unemployment rate (15-24 age groups), dropped to 2.1% in March from 2.3% a month ago.

Highlights

On rates

Fedspeak and higher inflation expectations pushed rates higher during the week. Regarding the later, the main catalyst were rising tensions in the Middle East, with Brent crude oil prices closing above $90/bbl for the first time since Oct., which in turn added to existing fears about inflation - the US 2yr inflation swap close at its highest since October at 2.54%, ahead of Wednesday’s monthly headline CPI expected at +3.4% for the headline measure and +3.7% for the core one. Treasuries benefited from the risk-off turn. Yields reached new highs for the year, with the front end 2yr yields jumping by +13.1bps to 4.75%. The 10yr yield closed the week at 4.40%, and the 10yr real yield rose to 2.03%. In terms of rate cuts, in the US just 62bps of rate cuts are priced in by the Dec. meeting, which is a long way from the 158bps expected at the start of the year.

What to watch

• Monday: Switzerland unemployment rate (Mar.); Germany industrial production (Feb.)
• Tuesday: US NFIB small business optimism (Mar.); ECB bank lending survey
• Wednesday: US CPI (Mar.), FOMC meeting minutes; South Korea Parliament elections; Bank of New Zealand & Canada interest rate decisions
• Thursday: ECB interest rate decision; US PPI (Mar.), Initial & continuing jobless claims; China: CPI (Mar.)
• Friday: US Univ. Michigan consumer sentiment index & inflation expectations (Apr.)