2024 Weekly Update

Market update

The S&P 500 closed the week at 5,123.41, -1.56% lower. The Dow Jones closed at 37,983.24, -2.37%, with the Nasdaq lower by -0.45%. The volatility index VIX closed the week at 17.31 up from 16.03. The Euro Stoxx 600 slipped -2.04%.

The 10-year UST closed at 4.52% up from 4.40% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -88bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 154bps and High Yield tightened 12bps at 328bps. German 10-year Bunds yield closed at +2.36% down from +2.40% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 120bps and High Yield spreads tightened 7bps to 356bps.

The US Dollar Index (DXY) appreciated +1.67% last week and closed at 106.04. The Euro closed at 1.0643 (-1.79%); the Yen depreciated -1.06%, closing at 153.23 and the Swiss Franc depreciated -1.32%, closing at 0.9137. Gold closed at $2,344.37 appreciating +0.63%. Oil was lower, Brent closed at $90.45 (-0.79%) and WTI at $85.66 (-1.44%).

Macroeconomy

US inflation

The March headline CPI came in at +0.4% monthly (vs. +0.3% expected). This pushed y-o-y rate to a 6-month high of +3.5%. Core CPI monthly print was +0.4% (vs. +0.3% expected), with the y-o-y unchanged at +3.8%. While core goods prices were down (-0.15%), core services (+0.52%) saw fresh persistence. And even though some outliers contributed to this - notably a +2.6% monthly rise in motor vehicle insurance - the Cleveland Fed’s trimmed mean measure (wh66ich excludes the biggest outliers) still came in at a strong +0.3%. The bigger picture is that this is now the third consecutive month that core CPI has been at +0.4% with the major concern being that inflation is ending up sticky above the Fed’s target at 2%. The 3-month core CPI now running at an annualized rate of +4.5%. The University of Michigan survey showed that one-year inflation expectations increased to 3.1% in April from 2.9% in March, rising just above the 2.3-3.0% range seen in the two years before the COVID-19 pandemic. Survey's five-year inflation outlook rose to 3.0% from 2.8% in March.

Fedspeak

After the CPI print, two fed speakers expressed a degree of concern. Chicago Fed president Goolsbee (non-voter) said that “these first three months of this year, they’re definitely worse” and that “we’re getting to the point where there’s going to be more trade-offs than there were last year”. Meanwhile, Richmond Fed president Barkin (voter) noted that “we’re making a lot of progress but we need to be humble about how easy it is to get there”. Later in the week, remarks signaled they are not in a hurry to cut rates. For instance, New York Fed President Williams said “there’s no clear need to adjust policy in the very near term”. Meanwhile, Boston Fed President Collins said that the recent data “implies that less easing of policy this year than previously thought may be warranted.” And Richmond Fed President Barkin said that “We’re not yet where we want to be” when it came to inflation.

ECB meeting

The ECB left their deposit rate at 4% as expected. However, their statement suggested that they were moving closer to rate cuts, as it said “If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.” So a clear signpost that rate cuts could be near, and investors raised the chance of a cut by the June meeting from 82% to 87% by the close. Earlier in the week, the ECB Bank Lending Survey for Q1 showed a continued turn in the bank credit cycle. Pockets of weakness were still evident, including a deterioration in demand for corporate loans, probably reflecting the rise in rates since the start of the year. But with banks expecting further normalization in Q2, the BLS points to an improving cyclical picture in the euro area. That said, whether this improvement materializes may well depend on whether expectations of upcoming ECB rate cuts prove accurate.

Other central banks

The minutes of the March FOMC meeting included discussions on the future slowing of QT (quantitative Tightening), saying that “the vast majority of participants (…) judged it would be prudent to begin slowing the pace of runoff fairly soon”. It also said that “participants generally favored reducing the monthly pace of runoff by roughly half from the recent overall pace”, and FOMC members favored reducing the monthly cap on the Treasury runoff, while seeing little need to adjust the (currently non-binding) cap on the runoff of MBS. Also, the Bank of Canada left their policy rate on hold at 5%. That was in line with expectations, and Governor Macklem said afterwards that “The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip”. Lastly, the Reserve Bank of New Zealand maintained the Official Cash Rate at 5.5%, and their statement said that “a restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation”.

Highlights

Earnings

The 2023 Q4 was another strong quarter for earnings, beating consensus by 4% and EPS growth accelerating to +8% y-o-y. In the current 2024 Q1 reporting season, consensus projections have been moving materially lower over the past several months. For the S&P500, consensus is now calling for 3% y-o-y EPS growth rate, which is down from 10-12% projections seen last summer. For Europe, the Q1 y-o-y growth rate is at -11%; however, the median number moves up to -1% y-o-y, given some significant outliers. Ex- Magnificent 7, S&P500 EPS growth expectation is outright negative for the 5th quarter in a row, at -2.6% y-o-y. On Friday, large banks were the first to report in the US. C (Citigroup) reported EPS upside, with the beat driven by higher sales, expense discipline, and lower provisions, and the guidance for 2024 was left unchanged; JPM (JPMorgan) reported EPS upside thanks to higher revenue, expense discipline, and lower provisions, but NII fell 4% q-o-q and the full-year NII outlook is unchanged at $90bn despite the favorable move in rates; WFC (Wells Fargo) reported EPS upside thanks to higher revenue and lower provisions while they repurchased an enormous amount of stock in Q1 ($6.1bn), but the full-year NII forecast is unchanged.

On rates

The bond market experienced significant activity this week, with the largest daily rise in the 10-year Treasury yield (+18bps) since Sept. 2022, following an unexpected upside in inflation. This led to a broad-based rise in both the UK and German government bond yields, albeit to a lesser extent. The 2-year US yield saw its largest daily increase in over a year, reaching 4.97% on Wednesday. A coinciding Treasury auction on the same day, marked by weak demand, intensified the bond sell-off. Compared with US Treasuries, the rise in Bund yields was less pronounced due to a smaller repricing of market expectations for the ECB. Indeed, the US CPI surprise led to a significant reassessment by the market of its rate cuts expectation this year. The euro area is experiencing a more sustained disinflation process than in the US. This paves the way for a potential rate cut in June by the ECB. In the US, the better economic activity and a tight labor market resulted in a rise in the inflation-linked yield.

What to watch

• Monday: US Empire Manufacturing (Apr.), Retail Sales (Mar.)
• Tuesday: Germany ZEW Survey (Apr.); US Housing Starts (Mar.), Ind. Prod. (Mar.); China GDP (1Q), Ind. Prod. (Mar.), Retail Sales (Mar.)
• Wednesday: UK CPI (Mar.)
• Thursday: US Leading Index (Mar.), Existing Home Sales (Mar.)
• Friday: Japan CPI (Mar.); UK Retail Sales (Mar.)