The numbers for the week – 8 Apr 24

The numbers for the week – 8 Apr 24

Markets last week

Summary
  • A plethora of strong economic data and a shift in tone from the US Federal Reserve (Fed) coincided with clear trends across markets with cyclical assets benefitting
  • Fed officials emphasised the need for further evidence of falling inflation before easing their interest rate policy
  • The global equity market fell 1.0%, yet remains up 8.3% year-to-date, while global bonds experienced a 0.7% decline, bringing year-to-date performance to -0.7%
  • The upward trend in bond yields accelerated with the US 10-year yield hitting a new high for the year at 4.4%
  • Cyclical equity sectors experienced a mild recovery with energy, industrials, and materials bucking the negative market trend, while the tech sector underperformed
  • Commodities rallied, with cyclical commodities like copper and oil outperforming
  • Gold surpassed the $2300 mark, driven by geopolitical uncertainties, concerns around US debt sustainability, strong demand from retail investors in China, and record demand from central banks
  • Next week US inflation data and the minutes from the March Federal Open Market Committee (FOMC) meeting will be in the spotlight.
  • The European Central Bank (ECB) rate decision on Thursday is unlikely to surprise as President Lagarde has been clear in her policy guidance. The market puts the odds of an ECB rate cut at 8% with a 97% chance of a cut by the following meeting in June.

Analysis

A subtle shift in the tone from the Fed has coincided with the emergence of some clear trends across markets with cyclical assets benefitting. Although performance was slightly weaker for equity and bonds investor sentiment remains positive. The global equity market fell 1.0% and is up 8.3% on a year-to-date basis. Global bonds fell 0.7% taking year-to-date performance to -0.7%.

Several high-profile Fed officials have recently highlighted the need for further evidence that inflation is falling before easing policy which has strengthened the ‘higher-for-longer’ narrative around interest rates in the US. The most notable example last week was Neel Kashkari, Minneapolis Fed President, who on Thursday questioned the need for rate cuts at all if inflation remains sticky this year and the economy remains resilient. The Fed’s dot plot, which represents the policymakers’ projections for future interest rates, still points to three rate cuts in 2024 but the most recent dot plot released in March shows an increase in dispersion of opinion amongst the FOMC.

The market has struggled with interest rate projections this year too, initially pricing in over six cuts for 2024. Throughout the course of the year the market has softened those expectations greatly and today expects fewer cuts than the Fed themselves with the first now priced in for September.

This change in expectations has impacted the bond market with yields rising throughout the year. A trend that accelerated last week as the US 10-year yield hit a new high for the year of 4.42%, and finished the week at a similar level.

The acceleration of the upward trend in bonds yields wasn’t driven purely by the shift in tone from Fed officials but also by a plethora of strong economic data. This included manufacturing data in the Institute of Supply Management (ISM) report, strong factory order data on Tuesday and on Friday the employment report with positive surprises on hiring, employment, labour participation and earnings.

These dynamics coincide with a recovery in more cyclical equity sectors. Those trading at depressed valuations, given the remarkable level of disinterest, outperformed last week including energy, industrials, and materials while the relatively expensive tech sector underperformed. While the US equity market fell 1% last week energy, industrials and materials all bucked the trend posting positive returns. Similar trends were seen across developed equity markets.

Commodities enjoyed a robust rally, with cyclical commodities like copper rising 5.2%. Dubbed ‘Dr Copper,’ this metal serves as a keen barometer for economic health. Oil, another cyclical commodity, gained as well with Brent closing above US$90/bbl. Oil prices were supported by military tensions between Israel and Iran as well as a supply shock from Mexico where oil shipments dropped by 35% in March.

Gold continues to march higher passing the US$2300 mark for the first time closing the week at US$2329.8. Gold is surprising investors as historically the commodity has been closely correlated to real bond yields – the opportunity cost for owning gold – however in recent years as real yields have moved higher gold has reached new all-time highs. An interesting theory suggests that this change in correlation could be driven by US debt sustainability concerns; as real yields rise the real interest cost on the US government’s debt rises, making gold an attractive alternative. The current gold excitement has other drivers worth noting; heightened geopolitical uncertainties, strong demand from retail investors in China, and record demand from central banks. Gold mining stocks are benefitting from the surge in the underlying commodity appreciating 6.8% last week.

The week ahead

Wednesday: US inflation

Our thoughts: Sidling inflation has become more of a concern as the year has progressed, but the March data is expected to show some moderate progress with falls expected primarily in the stickier core measure of inflation. Headline Consumer Price Indices (CPI) however is expected to have risen to 3.4% in March from 3.2% in February driven by higher energy costs. The process of disinflation is likely to remain uneven.

Wednesday: FOMC minutes

Our thoughts: Given the increased dispersion in the dot plots (as mentioned above) and the increasingly hawkish tone of FOMC speakers, the minutes will be analysed with a fine tooth comb. We expect them to show officials still broadly anticipating three cuts this year but the strong data and reluctance of inflation to budge has very likely added a pinch more uncertainty into the discussions.

Thursday: ECB rate decision

Our thoughts: The ECB are in an easier position than their US counterparts as progress on inflation has been more consistent. Last week inflation for March surprised to the downside and is in the vicinity of the 2% central banks target. ECB President Lagarde has become more dovish since the previous meeting but is likely to keep the policy rate on hold this week. The Governing Council seem to have focussed on the June meeting for the first cut. The market puts the odds of an ECB rate cut on Thursday at 8% with a 97% chance of a cut by the following meeting in June.

The numbers for the week


Sources: FTSE, Canaccord Genuity Wealth Management

 

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