2024 Weekly Update

Market update

The S&P 500 closed the week at 4,967.23, -3.05% lower. The Dow Jones closed at 37,986.40, +0.01%, with the Nasdaq lower by -5.52%. The volatility index VIX closed the week at 18.71 up from 17.31. The Euro Stoxx 600 slipped -1.07%.

The 10-year UST closed at 4.62% up from 4.52% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -82bps. US Corporate Bond spreads: Investment Grade widened 6bps at 160bps and High Yield widened 21bps at 349bps. German 10-year Bunds yield closed at +2.50% up from +2.36% a week before. In Europe, Corporate Investment Grade spreads widened 6bps at 126bps and High Yield spreads widened 9bps to 365bps.

The US Dollar Index (DXY) appreciated +0.11% last week and closed at 106.15. The Euro closed at 1.0656 (+0.12%); the Yen depreciated -0.92%, closing at 154.64 and the Swiss Franc appreciated +0.38%, closing at 0.9102. Gold closed at $2,391.93 appreciating +2.03%. Oil was lower, Brent closed at $87.29 (-3.49%) and WTI at $83.14 (-2.94%).

Macroeconomy

Fed speak

Fed Chair Powell mentioned the risks of a greater delay to rate cuts, saying that the “the recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence” in the path of inflation and noting that the Fed can keep rates steady “as long as needed”. On that same day, Fed Vice Chair Jefferson said that “if incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer. I am fully committed to getting inflation back to 2%”. So, an explicit acknowledgement that further upside inflation surprises would lead to a longer period of restrictive policy. Later in the week, New York Fed President Williams said “I definitely don’t feel urgency to cut interest rates.” In response to a question, he commented that another rate hike wasn’t his baseline but that “if the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that”. Meanwhile, Atlanta Fed President Bostic said that “I’m comfortable being patient”, reiterating his view that the Fed “won’t be in a position to reduce our rates until toward the end of the year”.

ECB cut in June?

In Europe, ECB President Lagarde confirmed that the ECB were moving closer towards a rate cut, saying that “if we don’t have a major shock in developments, we are heading towards a moment where we have to moderate the restrictive monetary policy that we have”. But even so, it was clear that the potential for a more hawkish Fed was having an impact on their thoughts, and Lagarde said that the ECB needed to pay attention to changes in exchange rates. Later in the week, Finnish central bank governor Rehn said “provided that we are confident that inflation will continue converging to our 2% target in a sustained way, the time will be ripe in June to start easing the monetary policy stance and to cut rates”. Austria’s Holzmann, one of the most hawkish ECB members, said that “if inflation develops as expected and, above all, the geopolitical problems don’t worsen, there will likely be a majority for an interest rate cut in June”. We also got some hints on what the ECB approach might look like beyond June. Lithuania’s Simkus considered about three rates cut this year as a baseline, while Latvia’s Kazaks saw “no rush in kind of further pace of rate cuts”. By contrast, France’s Villeroy suggested that consecutive rate cuts may be in play, noting that “When we say meeting by meeting, it can be at each following meeting - I don’t think (…) that we should concentrate our rate cuts at quarterly meetings when we have a new forecast”.

UK inflation

In the UK, both headline and core CPI surprised to the upside in March, reaching 3.2% and 4.2% y-o-y respectively, albeit in decline compared to the previous month. This was primarily due to services inflation remaining elevated and above consensus. Food, alcohol and tobacco demonstrated significant deceleration as the negative growth in energy prices is starting to fade away. Overall, the surprise appears to be centered to a small number of components, notably housing costs. At the same time, the Feb. labor market report provided overall mixed signals. The data revealed some weaknesses in employment as the unemployment rate came above consensus, rising to 4.2%. The biggest surprise was a decrease in employment of -158k, in stark contrast to a consensus of +58k. Nonetheless, wage growth came stronger than expected, exerting additional pressure on inflation.

China data

Chinese Q1 GDP surprised on the upside. Economy expanded by 5.3% y-o-y in Q1, or 1.6% q-o-q. The industrial sector expanded faster than services. The upside surprise was likely from two sources. The first is stronger-than-expected exports and the other is rising fixed-asset investment in manufacturing sector and resilient infrastructure investment. However, domestic consumption remains weak and there was no improvement in the housing sector. As a result, the nominal GDP growth in Q1 was only 4.2%, notably below the real growth. The deflationary force was also visible in export numbers, where exports in real terms expanded much faster than in nominal terms, indicating a deterioration of China’s terms of trade.

IMF expectations

The IMF released their latest World Economic Outlook yesterday, including growth forecasts for the global economy. They upgraded their global growth forecast for 2024 by a tenth relative to January, and now see growth of +3.2% this year. In particular, there were upgrades for the United States, which moved up six-tenths to +2.7%, although the Euro Area was downgraded a tenth to +0.8%. For 2025, they left their global growth forecast unchanged at +3.2%. The IMF published their latest Fiscal Monitor as well, which projected that government debt would continue to rise globally over the years ahead. Their forecasts for general government gross debt saw an increase globally from 93.2% of GDP in 2023 to 98.8% by 2029. For the United States, it saw debt rising from 122.1% in 2023 to 133.9% in 2029.

Highlights

Earnings

For Q1 2024, y-o-y earnings growth for S&P 500 companies is expected to be around 2.5%. So far, more than 70 companies have reported and all sectors except Energy, Basic Resources, and Real Estate reported earnings above expectations. The Financial sector saw significant improvement in earnings surprises with 69% of companies exceeding EPS expectations. However, the proportion of sales beats (56%) remains weaker than the historical average (59%), suggesting a continued sluggish demand backdrop. There was also some weakness in the tech sector. ASML posted sales and orders below expectations, Netflix gave weaker than expected sales guidance, and TSMC cut its semiconductor market forecast. This week, 178 S&P500 companies will report. All eyes will be on Microsoft, Alphabet, and Meta which make 15% of market cap.

On rates

Last week was another active one as investors dialed back the number of rate cuts expected by year-end. Following Powell’s comments, market participants adjusted their year-end expectations. Investors are now pricing 40bps worth of rate cuts for 2024. On the back of this, 2yr Treasury yields jumped +8.8bps while 10yr Treasury yields rose +9.9bps to 4.62%. Core PCE deflator data release on Friday will be closely watched as markets continue to determine the timing of Fed rate cuts. In Europe, the data remains consistent with the ECB and the BoE cutting rates in June.

What to watch

• Monday: Eurozone Consumer Confidence (Apr., prel.)

• Tuesday: Japan Jibun Bank PMI (Apr., prel.); Eurozone HCOB PMI (Apr., prel.); UK, US S&P Global PMI (Apr., prel.); US New Home Sales (Mar.)

• Wednesday: Germany IFO Survey (Apr.); US Durable Goods Orders (Mar., prel.); Bank of Indonesia Key Rate Decision and Briefing

• Thursday: US GDP (1Q, advanced); US Core PCE Price Index (1Q, advanced)

• Friday: Bank of Japan Monetary Policy Decision; Japan Tokyo CPI (Apr.); US Personal Income and Spending (Mar.)