2024 Weekly Update

Market update

The S&P 500 closed the week at 5,222.68, +1.85% higher. The Dow Jones closed at 39,512.84, +2.16%, with the Nasdaq higher by +1.14%. The volatility index VIX closed the week at 12.55 down from 13.49. The Euro Stoxx 600 surged +3.13%.

The 10-year UST closed at 4.50% down from 4.51% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -91bps. US Corporate Bond spreads: Investment Grade remained at 155bps and High Yield remained at 327bps. German 10-year Bunds yield closed at +2.52% up from +2.50% a week before. In Europe, Corporate Investment Grade spreads tightened 2bps at 122bps and High Yield spreads tightened 11bps to 342bps.

The US Dollar Index (DXY) appreciated +0.26% last week and closed at 105.30. The Euro closed at 1.0771 (+0.09%); the Yen depreciated -1.78%, closing at 155.78 and the Swiss Franc depreciated -0.12%, closing at 0.9065. Gold closed at $2,360.50 appreciating +2.55%. Oil was mixed, Brent closed at $82.79 (-0.20%) and WTI at $78.26 (+0.19%).

Macroeconomy

Fedspeak

It was an active week for Fed speakers. Richmond Fed President Barkin said he was “optimistic that today’s restrictive level of rates can take the edge off demand in order to bring inflation back to our target”, noting that “the full impact of higher rates is yet to come”. New York Fed President Williams signaled eventual rate cuts, though with the timing of these to depend on “the totality of the data”. Minneapolis Fed President Kashkari (a non-voter this year) said that “with inflation in the most recent quarter moving sideways, it raises questions about how restrictive policy really is”. Kashkari was already one of the most hawkish-sounding members on the FOMC, so the comments must be taken in context. Fed's Collins said getting to 2% target may take longer than expected. Lastly, San Francisco's Daly noted that inflation is going to be a bumpy ride and is still too high, though she also said no evidence labor market is in a worrisome position.

Senior Loan Officer Survey

Survey of up to 80 large domestic banks and 24 US branches and agencies of foreign banks. Questions cover changes in the standards and terms of the banks' lending and the state of business and household demand for loans. The survey showed the tightness in credit standards continuing to moderate for most loan categories, including mortgages and CRE lending. However, the improvement in conditions for commercial & industrial loans stalled, with credit standards for mid-size and large firms a little tighter (+15.6 vs. +14.5) and demand a little weaker (-26.6 vs. -25.0) than in the previous quarter. Nothing to get too concerning, but some evidence to support the view that a good chunk of the impact from the tighter policy stance is yet to play out. The question is where will rates and credit standards be by the time borrowing needs accelerate.

Bank of England

The BoE kept rates unchanged at 5.25%, in line with expectations. Unlike the March meeting, when the vote was 8-1 to keep rates on hold, there was now a 7-2 split after Deputy Governor Ramsden also voted for a cut. Moreover, there was an additional line in the statement, which said that the committee would “consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.” Then in the press conference, Governor Bailey said that a cut at the next meeting in June was “neither ruled out nor a fait accompli”, and he suggested that the reductions in bank rate could be “possibly more so than currently priced into market rates”. There are two more CPI prints coming out ahead of the BoE’s next decision. The day after, Q1 GDP showed the economy have expanded +0.6% in the first quarter of this year, exiting a technical recession it has entered into last year. The q-o-q figure compared with the 0.4% forecast. It was the fastest growth since the last three months of 2021, and was boosted by car manufacturing and broad-based growth in services. Overall, the decision and comments led investors to price in a growing probability of a rate cut by the next BoE meeting in June, with overnight index swaps raising the chance from 55% the previous day to 60% by the close. Front-end gilts also rallied on the prospect of faster rate cuts, with the 2yr yield coming down by -5.7bps. 10yr gilts did lose a bit of ground, with yields up +0.2bps.

Other central banks

The Swedish Riksbank became the second central bank with a G10 currency to cut rates in this cycle. The move was expected, but it was the first rate cut delivered since 2016, so it was a big milestone, which took the policy rate down by 25bps to 3.75%. In addition, the statement signaled that more cuts were likely ahead, saying that if the inflation outlook held up, then they expected two more cuts in the second half of this year. It’s also worth noting that they’re in a better position than some other central banks, as their preferred measure of inflation (CPIF) was at 2.2% in March, so just above their 2% target. The Riksbank’s decision follows the Swiss National Bank’s cut back in March, and it comes with mounting anticipation that the larger central banks are soon about to follow. In particular, the focus is turning to the ECB, who is increasingly expected to cut rates in four weeks’ time, marking the first cut since before the pandemic. Likewise, investors are now pricing in a 68% chance the Bank of Canada will cut at their next meeting in June. So, it’s plausible that within a couple of months, we could have several central banks easing policy, with the global monetary policy cycle in easing mode with the considerable exception of the US.

Highlights

Earnings

Q1 earnings season is slowly coming to an end in the US, with roughly 83% of S&P 500 constituents having reported. EPS is printing better than expected, up 6% y-o-y. The proportion of companies beating earnings expectations stands at 78%, above the 10-year average of 74%. At a sector level, Healthcare and Commodities are down on a y-o-y basis while Communication Services, Technology and Consumer Discretionary continue to be the biggest drivers of overall earnings growth. In Europe, 80% of Stoxx600 companies have reported and 58% of them have beaten EPS estimates, surprising positively by 4%. However, overall EPS growth is down 8% y-o-y, although well ahead of the -14% expected at the beginning of the quarter. Excluding the Energy sector (-21% EPS growth), overall earnings growth is running at -1% y-o-y. This week, only 10 S&P 500 companies and 62 Stoxx 600 companies will be posting their results.

On rates

Treasuries saw selling pressure last week as the survey from the University of Michigan for consumer index dropped to 67.4 from April’s 77.2. The 2yr yield rose +5.1bps on Friday, and +4.9bps on the week. Similarly, 10yr yields rose +4.3bps on Friday, ending the week at 4.50%. 1-year inflation expectations rose to 3.5% from 3.2% a month earlier, which shifted Fed expectations in a hawkish direction. The odds of a September cut fell to 80% (from 85%) while the amount of Fed rate cuts expected by December declined by 5.1bps on Friday (-4.9bps over the week). Investors now expect 40bps of aggregate reductions for the year. The story was similar in Europe with the amount of ECB cuts priced by December falling -3.2bps on Friday (and -5.0bps over the week) to 69bps. Yields on 10yr bunds were up +2.2bps (+2.2bps on Friday).

What to watch

• Monday: no major events
• Tuesday: US PPI (Apr.), NFIB small business optimism (Apr.); Euro area ZEW survey
• Wednesday: US CPI (Apr.), Retail sales (Apr.); Euro area GDP (Q1); Japan GDP (Q1)
• Thursday: US initial & continuing jobless claims, Industrial production (Apr.), Housing starts & building permits (Apr.)
• Friday: China industrial production & retail sales (Apr.)