2024 Weekly Update

Market update

The S&P 500 closed the week at 5,304.72, +0.03% higher. The Dow Jones closed at 39,069.59, -2.33%, with the Nasdaq higher by +1.41%. The volatility index VIX closed the week at 11.93 down from 11.99. The Euro Stoxx 600 slipped -0.65%.

The 10-year UST closed at 4.46% up from 4.42% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -95bps. US Corporate Bond spreads: Investment Grade spreads widened 1bp at 153bps and High Yield tightened 1bp at 324bps. German 10-year Bunds yield closed at +2.58% up from +2.52% a week before. In Europe, Corporate Investment Grade spreads tightened 3bps at 120bps and High Yield tightened 9bps at 342bps.

The US Dollar Index (DXY) appreciated +0.27% last week and closed at 104.72. The Euro closed at 1.0847 (-0.20%); the Yen depreciated -0.86%, closing at 156.99 and the Swiss Franc depreciated -0.62%, closing at 0.9147. Gold closed at $2,333.83 depreciating -3.37%. Oil was lower, Brent closed at $82.12 (-2.21%) and WTI at $77.72 (-2.92%).

Macroeconomy

Fedspeak

The minutes of the last Fed meeting were published. They said that “various participants mentioned a willingness to tighten policy further” if needed. So that pointed to more hawkish concerns than the market had taken away from Powell at the press conference on May 1. On top, we had several Fed speakers last week. Vice Chair Jefferson described the April inflation data as “encouraging”, and Vice Chair for Supervision Barr said that “I think we are in a good position to hold steady and closely watch how conditions evolve.” Such patience was also visible from San Francisco Fed President Daly who noted there was no “urgency” to adjust rates, while Cleveland Fed President Mester stated that “It’s too soon to tell what path inflation is on”. Fed Governor Waller said that “in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy.” In addition, he said that “We’re not seeing anything right now that looks like staying here for three or four months is going to cause the economy to go off a cliff”. So like Powell’s recent comments, senior Fed officials are in no rush to think about rate cuts but are certainly not reacting that hawkishly to the latest inflation data either.

US data

US weekly initial jobless claims fell back to 215k (vs. 220k expected). That’s a second weekly decline and suggests that the spike to 232k a couple of weeks ago was just a blip. The flash composite US PMI for May rose to its strongest in over two years, at 54.4 (vs. 51.2 expected). That was led by a strong rebound in services activity (from 51.3 to 54.8), while manufacturing also ticked up (from 50.0 to 50.9). So, the data suggested there’s little urgency for the Fed to cut rates anytime soon, and the odds of a cut by the Sept. meeting were slashed to 55%, down from 82% the Friday prior.

Europe data

The euro area composite PMI slightly surprised on the upside in May, rising from 51.7 to 52.3 (52.0 was expected). Business activity, new orders and employment all rose at a faster pace. Both input and output costs eased in May. Growth continues to be driven by the services sector. The services PMI remained stable in expansionary territory at 53.3 in May (53.6 was expected). The manufacturing sector remained in contraction territory, but the PMI improved more than expected from 45.7 to 47.4 (46.1 was expected). Stronger growth in business activity was seen in Germany and the rest of the euro area excluding Germany and France. In France, activity contracted after a slight increase in recent months. At the same time, negotiated wages in the euro area rose +4.7% yoy in Q1 2024 from 4.5% yoy in Q4 2023, surprising the consensus to the upside. The biggest surprise came from Germany, where wages rose 5.6% yoy in Q1 after several quarters of lower growth rates. Wage agreements reached in 2023 are now coming into effect, which explains the pickup in Germany. We heard from several ECB speakers. President Lagarde said that “there is a strong likelihood” of a move in June, and that “I’m really confident that we have inflation under control”. BoE Deputy Governor Broadbent said in a speech that “it’s possible Bank Rate could be cut some time over the summer”. And Latvia’s Kazaks said that “it’s quite likely June is going to be the time when we start the rate cuts”, and he did warn that the “process needs to be cautious, gradual and we should not rush”.

UK data

The UK CPI print showed headline CPI falling to +2.3% in April, which is the lowest in almost three years, and down from +3.2% the previous month. However, the reading was above the +2.1% expected, and core CPI also surprised on the upside at +3.9% (vs. +3.6% expected). The March labor market report provided again some mixed signals. There were some weaknesses in employment as the unemployment rate rose to 4.3%, in line with consensus. Total employment declined by -177k, less than expected (-220k). Wage growth came stronger than expected, exerting additional pressure on inflation. UK manufacturing PMI (flash estimate) surprised to the upside, reaching 51.3 (consensus 49.5) and re-entering into expansionary territory. However, both services and composite PMI surprised to the downside. Overall, business activity appears to be driven by a rise in new orders and a marginal increase in export sales, providing additional tailwinds to growth. The chance of a June cut fell from 58% the previous week to 8% by Friday.

Japan data

Japanese core inflation (all items excluding fresh food) moderated to 2.2% in April, and the new core inflation (all items excluding fresh food and energy) moderated to 2.4%, both in line with expectations. Most major components of the CPI index remained on a downward trend, especially service inflation, and the only exception is energy inflation, due to the rebound in crude oil prices. Lastly, Japanese export growth held up in April, rising by 8.3% y-o-y in nominal yen terms. But the strength was almost entirely due to the weak currency effect because in real (volume) terms, Japanese exports actually contracted by -0.7% y-o-y.

Other central banks

April Canadian CPI slowed to +2.7% y-o-y, as expected. That helped to bolster expectations that the Bank of Canada would cut rates at their next meeting, and investors priced up the chance of a June cut to 64%, from 43% the previous day. Reserve Bank of New Zealand left interest rates unchanged at 5.5%. There were some hawkish elements, as Governor Orr said raising rates was a “real consideration”, and they forecast rate cuts will now happen later in 2025 than before.

Highlights

Market concentration

After yet another strong quarter from mega-cap companies, concentration within the US equity market has reached record levels. The 10 largest companies account for more than a third of the S&P500 market cap and the magnificent 7 have driven more than 50% of index’s performance year-to-date. These 7 companies now generate more profits than the listed Japanese equity universe and have become as impactful as large countries on the global macroeconomy. This narrow leadership is naturally a source of worry for some investors. However, today’s market concentration is supported by solid fundamentals especially when compared to previous episodes of high concentration. In fact, the median valuation of the 10 largest stocks is substantially lower than the comparable median during the 2000 tech bubble, and the median top 10 market cap constituent is nearly three times more profitable than it was in 2000 or 1973.

What to watch

• Monday: Germany IFO (May)
• Tuesday: US Conf. Board Consumer Conf. (May)
• Wednesday: Germany CPI (May); US retail sales (Apr.)
• Thursday: US GDP (Q1), Personal consumption (Q1), PCE (Q1)
• Friday: Japan Jobless rate (Apr.), Tokyo CPI (May)