The numbers for the week – 25 Mar 24

The numbers for the week – 25 Mar 24

Markets last week

Summary
  • Financial markets experienced another positive week, with risk assets supported by stability in bond yields after uneventful Federal Reserve and Bank of England meetings
  • The US stock market reached new highs, with a 3.4% gain, taking year-to-date returns to 11.2%
  • US High Yield credit spreads narrowed through 3%, to levels not seen since January 2022, before the first interest rate hike
  • The FOMC revised growth and inflation estimates higher for 2024 and are still hinting at three rate cuts this year
  • Investor confidence remains buoyant, which may persist so long as a significant easing cycle remains on the horizon
  • The Bank of Japan stole the show by raising rates for the first time in 17 years, abandoning ultra-loose policies, leading to a 5.3% rise in Japanese equities
  • The Japanese yen continued to weaken against the dollar, despite the policy changes
  • UK equities performed well, with the FTSE All Share and FTSE 100 rising 2.4% and 2.6%, respectively
  • The Bank of England maintained policy rates, but a shift in voting balance suggests a more dovish stance, hinting at rate cuts. Softer-than-anticipated UK inflation data supports the case.
 

Analysis

It was another positive week for financial markets, as stability prevailed in bond yields following an uneventful US Federal Reserve (Fed) meeting. While the gathering offered little fresh insight, it provided a conducive environment for risk assets to maintain their upward trajectory.

The US stock market keeps hitting new highs, and credit spreads are getting narrower. The US equity market gained 3.4%, taking year-to-date gains to 11.2% in GBP terms. US High Yield credit spreads have tightened through 3%, to levels not seen since January 2022, before the first interest rate hike of the cycle.

The Federal Open Market Committee (FOMC) revised their growth and inflation estimates higher for 2024, while still hinting at three rate cuts this year. In the face of persistent inflation, Chairman Powell remains on the market’s side and investor confidence is buoyant. In fairness, under the bonnet of the inflation data you can still derive a finely balanced disinflation and, even if data keeps pushing against lower rates, we think investors will be okay with delayed rate cuts, so long as confidence remains that a significant easing cycle is coming. The timing of cuts matters less than the direction of travel.

As anticipated, the Bank of Japan (BoJ) stole the show. After 17 years without a single interest rate hike, the BoJ raised rates, pulling the plug on their ultra-loose policies of negative interest rates and yield curve control (YCC). With inflation well above the 2% target and wages going up, prices are likely to keep rising, especially with a weaker yen.

In response to the move, Japanese equities had a storming week, rising 5.3%, but the yen continued to weaken, falling 1.6% against the dollar. There’s an interesting asymmetry in the relationship between the yen and yields. When shifts in relative yields between the US and Japan move in a way that favours the yen, the currency experiences only modest gains, but when these moves are unfavourable, the yen suffers disproportionately. The BoJ may have hoped that their abandonment of YCC and negative rate policy would have changed the negative momentum of the currency, however given the strength of the signal (the quantitative signal for systematic hedge fund strategies) and the deeply negative carry (relative yields on Japanese Government Bonds vs US Treasuries), it’s hard to know when this dynamic will shift. Without further policy adjustment, the yen may remain under pressure.

Equities in the UK performed well, with the FTSE All Share rising 2.4% and the large cap FTSE 100 index up 2.6%: close to record highs. The Bank of England meeting went as expected, with no change in the policy rate. There was, however, a shift in the balance of votes on the Monetary Policy Committee, with the two remaining hawks (who had previously voted to raise rates) voting this month to remain on hold. Governor Bailey was notably dovish too, saying that cuts were “on the way”. This dovish shift is seen as a positive step towards rate cuts later this year, which has in turn helped to spur on the equity market. Inflation data in the UK came in softer than anticipated, also adding to the case for rate cuts and intensifying the positive sentiment.


The week ahead

It is a quiet week in the economic calendar, as most markets will be closed on Friday in observance of Good Friday.

Friday: US personal income and spending report

Our thoughts: In February, the strong jobs reports and a rebound in retail sales are expected to show in the personal income and spending report. Personal income is expected to rise by 0.4%, whilst overall spending is estimated to have increased by 0.5%. Monthly personal consumption expenditure (PCE) inflation is anticipated to reach 0.4%, with annual headline PCE inflation rising to 2.5%, from 2.4%. The core measure is expected to slow to 0.3% month-on-month, with an annual rate steady at 2.8%.

The numbers for the week

 

Sources: FTSE, Canaccord Genuity Wealth Management

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