2024 Weekly Update

Market update

The S&P 500 closed the week at 5,277.51, +0.18% higher. The Dow Jones closed at 38,686.32, -0.97%, with the Nasdaq lower by -0.01%. The volatility index VIX closed the week at 12.92 up from 11.93. The Euro Stoxx 600 slipped -0.46%.

The 10-year UST closed at 4.50% up from 4.46% 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 spreads tightened 1bp at 152bps and High Yield widened 10bps at 334bps. German 10-year Bunds yield closed at +2.66% up from +2.58% a week before. In Europe, Corporate Investment Grade spreads remained at 120bps and High Yield tightened 14bps at 328bps.

The US Dollar Index (DXY) depreciated -0.05% last week and closed at 104.67. The Euro closed at 1.0848 (+0.01%); the Yen depreciated -0.20%, closing at 157.31 and the Swiss Franc appreciated +1.36%, closing at 0.9023. Gold closed at $2,327.33 depreciating -0.28%. Oil was lower, Brent closed at $81.62 (-0.61%) and WTI at $76.99 (-0.94%).

Macroeconomy

US data

Q1 GDP growth was revised down to an annualized pace of just +1.3%, having been at 1.6% in the first estimate. That included downward revisions on the consumer spending side, with personal consumption expenditures revised down half a point to +2.0%, whilst final sales to private domestic purchasers was also revised down three-tenths to +2.8%. That final measure was something Chair Powell had cited in his May press conference, as it was argued that underlying demand was strong despite the slowdown in headline growth. On the inflation side, Q1 headline PCE inflation was revised down a tenth to 3.3%, whilst core PCE inflation was also revised down a tenth to 3.6%. Later, the personal consumption expenditures (PCE) price index increased 0.3% in April, the Commerce Department's Bureau of Economic Analysis said on Friday, matching the unrevised gain in March. In the 12 months through April, the PCE price index rose 2.7% after advancing at the same pace in March. Economists polled by Reuters had forecast it would climb 0.3% on the month and 2.7% on a y-o-y basis. The PCE price index is one of the inflation measures tracked by the Fed for its 2% target.

ECB cut this week?

HICP inflation surprised to the upside, with the headline figure accelerating more than expected to 2.6% in May. Most importantly, core inflation rose to 2.9%, two tenths above consensus expectations, driven by services inflation, which is back above 4% after a temporary dip in April, while core goods inflation has eased again (+0.8%). Energy inflation is back in positive territory (+0.3%), while food inflation fell slightly (+2.6%). This print is not expected to prevent the Governing Council from cutting its key rates by 25 bps this week, bringing the reference rate down to 3.75%. The move has been heavily telegraphed by Governing Council members in recent weeks and the decision is likely to be unanimous. Moreover, Christine Lagarde made it clear back in April that the Governing Council was prepared for some jolts in the disinflation process. ECB speakers leaned dovishly with French Governing Council member de Galhau suggesting they shouldn’t rule out back-to-back June/July cuts. Chief Economist Lane was also slightly dovish in an interview with the FT although didn’t provide any additional hopes to the July cut narrative. Finland's Olli Rehn also supported a cut this week. Looking forward, some marginal hawkish changes to the staff 2024 projections, in addition to the sticky Q1 wage growth and strong May services inflation, will support the hawkish case that the ECB should stop and see after the expected June cut.

OPEC

On Sunday, OPEC+ announced that it would be extending production cuts into 2025 and laid out plans for phasing out voluntary cuts towards the end of the year. Oil is abundant, with OPEC+ supply currently 5.1mbd (million barrels per day) below the pre-pandemic level. The spare capacity of OPEC, excluding Iran, amounts to 5.4mbd. Oil demand has been weak recently, especially in advanced economies. For instance, in the US, miles travelled are still below pre-pandemic levels. Additionally, EVs have begun to impact fossil fuel consumption, displacing 0.7mbd globally. The market has experienced a slight oversupply in the last two months.

Highlights

On rates

Global 10-year sovereign bond yields rose around 8bps over the week, on the back of weak US Treasuries auctions and mixed economic data. The increase was mostly driven by real yields and given that market participants’ policy rate path expectations are more hawkish than ours, we expect the US, UK and German 10-year yields to fall by year-end (to 4.3%, 4.1% and 2.3%, respectively). Over the week, the US yield curve steepened somewhat but remains deeply inverted. Moreover, despite weak auctions the term premium on the US 10-year yield has stayed in negative territory at -16bps. Monthly net issuances for US Treasury notes and bonds continue to be positive and represent the bulk of net issuances year-to-date at the expense of T-bills. This trend should continue while on a 12-month cumulative basis, net US Treasury issuances run extremely high at 2.5trn. In a context where supply is elevated and the Fed is disinvesting, it’s worth highlighting who are the new marginal buyers of US Treasuries. In Q4, these were mostly foreigners (in particular from Europe and Japan), money market funds (T-bills) and US households (partly hedge funds). Looking at the foreign holdings up to April 2024, Japanese and UK (where many hedge funds are based) investors have been large buyers again.

What to watch

• Monday: China Caixin manufacturing PMI (May); US manufacturing ISM (May)

• Tuesday: Switzerland CPI inflation (May); US durable goods orders (Apr.), New Home Sales (Mar.)

• Wednesday: Canada BoC decision (June); US services ISM (May)

• Thursday: Euro area ECB decision (June), start of the Parliament elections (June); US unit labor cost (Q1)

• Friday: Germany IP (Apr.); US nonfarm payrolls (May)