Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
The UK
Mortgage lenders in the UK approved 61,325 mortgages in March, up from 60,497 in February, according to the Bank of England. The increase to an 18-month high provided further evidence that the housing market began to recover this year. Still, the Nationwide Building Society’s house price index for April fell -0.4% sequentially, the second consecutive monthly decline and a sign that activity may be moderating.
The US
The main driver of last week’s gains in stock markets appeared to be Friday morning’s nonfarm payrolls report, showing that employers added 175,000 jobs in April, less than expected and the lowest number since November. While this signalled a cooldown in the labour market, and thus lower inflationary pressures, investors may have been more pleased by a surprise slowdown in monthly wage increases, from 0.3% in March to 0.2% in April. The year-over-year (YoY) gain fell to 3.9%, the slowest increase in almost two years. Similarly, average weekly hours worked fell back slightly, while the unemployment rate climbed slightly to 3.9%.
The news may have been particularly welcome because it followed some upside inflation and (more distinct) downward growth surprises earlier in the week – a combination that added to recent worries over emerging “stagflation” trends. Stocks fell sharply on Tuesday after the Labor Department reported that employment costs rose 1.2% in the first quarter – or an annual rate of nearly 5% – which was above expectations and the fastest pace in a year. A separate report showed home prices rising in February at their fastest pace in eight months.
Meanwhile, a gauge of business activity in the Chicago area fell to its lowest level since November 2022, and the Conference Board’s measure of consumer confidence declined in April to its lowest point in nearly two years. The Labor Department’s tally of March job openings, reported Wednesday, fell more than expected to 8.5 million, the lowest level in over three years. On Friday, the Institute for Supply Management (ISM) reported that its purchasing managers’ index (PMI) of services sector activity had fallen back into contraction territory for the first time since December 2022.
Investors seemed to take some encouragement from Federal Reserve (Fed) Chair Jerome Powell’s response to the data. In his press conference following the Fed’s two-day policy meeting, Powell pushed back against stagflation worries, stating that “I don't really understand where that's coming from” and citing current growth and inflation rates of around 3%. Powell also stressed that while policymakers were not prepared to cut rates – and rates were left steady at the meeting, as was widely expected – neither did they see the need to increase rates given the “sufficiently restrictive” current stance of monetary policy.
Europe
Eurozone GDP surprised to the upside, expanding 0.3% in the first quarter, after shrinking -0.1% in the final three months of 2023. The contraction registered in the fourth quarter of 2023 was a downward revision from 0.0%, meaning that the economy fell into a technical recession in the second half of last year. Meanwhile, annual consumer price growth was steady in April at 2.4%, but core inflation – which excludes energy and food prices – slowed to 2.7% from 2.9%.
European Central Bank (ECB) policymaker and Bank of France Governor François Villeroy de Galhau said that the latest data strengthened confidence that inflation would return to the 2% target by next year, suggesting that the ECB should be able to start lowering borrowing costs in June.
The Norwegian central bank held its key interest rate at 4.50%, saying it might have to keep borrowing costs higher for longer than previously envisaged to quell inflation.
Japan
The latest earnings season saw more than two-thirds of Japan’s large public companies report higher profits, according to an analysis of company earnings releases by the Nikkei news organisation. Generally, solid profit growth was attributable to a range of factors including yen weakness, price hikes and a rebound in inbound tourism. Many companies also felt the positive impact of developments relating to generative artificial intelligence (AI). However, some companies faced headwinds in the form of increased competition, particularly in China, and the negative effects of currency depreciation.
China
China’s top decision-making body, the 24-member Politburo, pledged to implement prudent monetary and fiscal support to shore up demand at its April meeting last Tuesday. Officials stated that China would make flexible use of monetary policy tools to restore growth, including possible cuts to interest rates and the reserve requirement ratio, which sets the amount of cash that banks must set aside in reserve.
The official manufacturing PMI was a better-than-expected reading of 50.4 in April, down from March’s 50.8, marking the second straight monthly expansion. The nonmanufacturing PMI reached a below-consensus 51.2, easing from 53 in March, as new orders and services activity stalled from the prior month. Separately, the private Caixin/S&P Global survey of manufacturing activity edged up to a better-than-expected 51.4 in April, marking its 16th month of expansion.
Slowing industrial profits growth pointed to deflationary pressures that continue to weigh on China’s economy. Profits at industrial firms declined in March and advanced 4.3% in the first quarter of 2024 YoY, slowing from a 10.2% gain in the January to February period, according to the National Bureau of Statistics.
The value of new home sales by the country’s top 100 developers slumped -45% in April from the prior-year period, in line with March’s decline, according to the China Real Estate Information Corp. Transactions fell by -13% from the previous month. China’s housing downturn, now in its fourth year, remains a significant drag on the economy, as it has made consumers reluctant to spend, leaving developers with a massive supply of unfinished apartments.
Australia
Australian retail sales fell -0.4% in April, worse than the market consensus of a 0.2% increase. Housing prices rose 0.7% in April, with housing sales volume falling to around historical average. The supply side data remained weak. Australian construction firms continued to report weaker activity overt the month.
Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.0% (-3.3% in April, 6.6% YTD).
In the US, the S&P 500 Index ended 0.6% higher (-4.1% in April, 8.0% YTD) following a volatile week featuring a raft of economic and earnings data. Growth stocks outperformed value shares and small-caps outpaced large-caps. The Russell 1000 Growth Index returned 1.0% (-4.2% in April, 9.5% YTD), the Russell 1000 Value Index was flat (-4.3% in April, 5.3% YTD) and the Russell 2000 Index gained 1.7% (-7.0% in April, 0.8% YTD), moving back into slightly positive territory for the YTD period. The technology-heavy Nasdaq Composite Index advanced 1.4% (-4.4% in April, 7.9% YTD)
It was the second-busiest week of first-quarter earnings reports, and a positive reception to Apple’s earnings release after the close of trading on Thursday seemed to help drive a rebound in overall sentiment. The company beat consensus revenue expectations, but investors also appeared enthused by Apple’s announcement that it would buy back USD 110 billion of its own shares, the largest such repurchase in history. Another notable mover for the week was Tesla, which surged over 15% on Monday after founder Elon Musk made a surprise appearance in China following news of the government’s tentative approval of the self-driving technology the company has under development.
In Europe, the MSCI Europe ex UK declined -0.7% (-2.0% in April, 6.2% YTD). Investors appeared to become more cautious amid mixed corporate earnings and uncertainty surrounding the outlook for interest rates after June. Major stock indexes retreated. Germany’s DAX Index decreased -0.9% (-3.0% in April, 7.5% YTD), France’s CAC 40 Index lost -1.1% (-1.9% in April, 6.9% YTD) and Italy’s FTSE MIB Index weakened -1.8% (-1.4% in April, 13.1% YTD). Switzerland’s SMI Index pulled back -0.5% (-2.7% in April, 4.0% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.08 for EUR, up from 1.07.
In the UK, the FTSE 100 Index gained 0.9% (2.7% in April, 7.8% YTD), driven to a fresh high by strength in mining and energy stocks, and the FTSE 250 Index added 1.8% (0.9% in April, 3.6% YTD). The British pound was little changed versus the US dollar, ending the week at USD 1.25 for GBP.
As perceptions grew that Japanese authorities had intervened in the foreign exchange markets twice during the week to prop up the yen, Japanese stocks generated positive returns. The TOPIX Index rose 1.6% (-0.9% in April, 16.4% YTD) and the TOPIX Small Index firmed 0.5% (-1.6% in April, 9.8% YTD). Changes in the accounts of the Bank of Japan (BoJ) suggested that such interventions had taken place, although the authorities refrained from confirming that they had finally acted with a view to halting the Japanese currency’s historic slump. The yen strengthened to JPY 153.1 against the USD, from JPY 158.3 at the end of the previous week.
In Australia, the S&P ASX 200 Index put on 0.7% (-2.9% in April, 2.2% YTD) as the Fed communication confirmed that a rate hike is still off the table and the Chinese Politburo signalled more fiscal support. Australian government yields moved lower with the curve flattening. The Australian dollar strengthened against the US dollar by 0.7%.
MSCI Emerging Markets Index closed 2.0% higher (0.4% in April, 4.5% YTD), with a positive contribution to performance from the stock market of China, India, Taiwan, South Korea and Brazil.
Chinese stocks rose in a holiday-shortened week on hopes that the government will ramp up support. The Shanghai Composite Index was up 0.5% (2.1% in April, 4.4% YTD) and the blue-chip CSI 300 Index added 0.6% (2.0% in April, 5.2% YTD). In Hong Kong, the benchmark Hang Seng Index soared 4.7% (7.4% in April, 8.9% YTD). Markets in mainland China were closed from Wednesday for the Labour Day Holiday and will reopen on Monday, 6 May. Hong Kong markets were closed Wednesday but reopened Thursday.
In Poland, the government reported that headline inflation in April was measured at a YoY rate of 2.4%. This was generally in line with expectations and slightly higher than the 2.0% YoY rate measured in March. According to T. Rowe Price credit analyst Ivan Morozov, the higher reading is solely a reaction to higher food prices, as officials restored a 5% value-added tax (VAT) on food items from April. He estimates that core inflation probably slowed to a 4.4% YoY rate versus 4.6% in March.
Because the government seems poised to lift energy subsidies starting July, Morozov anticipates a temporary pickup in headline inflation – to possibly as high as 5% during the second half of 2024. This would seem to justify central bank officials’ recent lack of an appetite to reduce short-term interest rates. However, Morozov believes that inflation could later drop back to about 3% around the beginning of 2025. If this were to occur, he would expect policymakers to be in a better position to loosen monetary policy.
In Colombia, the central bank held its scheduled monetary policy meeting and decided to reduce its benchmark interest rate from 12.25% to 11.75%. Five members of the Board of Directors voted for a rate cut of 50 basis points (bp), but two other policymakers favoured larger cuts – one wanted 75bp, the other voted for 100bp.
In their post-meeting statement, central bank officials noted that annual headline inflation declined to 7.4% in March (versus 7.7% in February) and that “inflation excluding food and regulated items stood at 6.8%.” They attributed the drop in annual inflation to decreases in costs of goods and food. Looking forward, they noted that one- and two-year median inflation expectations were stable at 4.6% and 3.5%, respectively.
Policymakers also noted that the central bank’s technical staff revised their full-year 2024 and 2025 economic growth projections to 1.4% and 3.2%, respectively, citing “positive performance observed in certain primary and tertiary [services] sector activities during the initial months of the year.” While they unequivocally deemed their policy action as a “growth-enhancing” rate cut, they believe that their policy stance is still “in line with the objective of driving inflation” toward the central bank’s target by mid-2025.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.7% (-1.6% in April, -0.9% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.9% (-0.6% in April, 2.7% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index 1.0% (-1.6% in April, 0.5% YTD).
The evidence of a cooling jobs market helped push the yield on the benchmark 10-year US Treasury note to an intraday low of around 4.45% on Friday morning, its lowest level in nearly a month. Over the week, the 10-year Treasury yield decreased -16bp to 4.51% from 4.67% (up 48bp in April and 63bp YTD). The 2-year Treasury yield decreased -18bp to 4.82% from 5.00% (up 41bp in April and 57bp YTD).
European government bond yields generally declined, as policymakers downplayed growing concerns about the potential further interest rate increases by major central banks. Over the week, the 10-year German bund yield decreased -8bp, ending the week at 2.49% from 2.57% (up 29bp in April and 47bp YTD).
In the UK, the 10-year gilt yield declined -10bp, ending the week at 4.22% from 4.32% (up 41bp in April and 69bp YTD).
In Japan, despite some intraweek volatility, the yield on the 10-year Japanese government bond finished the week broadly unchanged at the 0.9% level, near a six-month high. This was within the context of strong US wage data raising concerns that the Fed will keep interest rates higher for longer. In March, the BoJ lifted interest rates from negative territory for the first time in seven years – with many now anticipating two further rate hikes within roughly a one-year period. Nevertheless, Japan’s monetary policy remains among the most accommodative in the world, and financial conditions are expected to remain accommodative also, for the time being.
Issuance was relatively light in the US investment-grade corporate bond market, and all issues were oversubscribed. Following a somewhat mixed start to the week, high yield bonds traded higher alongside equities in response to Powell’s relatively dovish press conference. Meanwhile, earnings reports continued to play a role in returns, while new deals that came to the market were generally met with solid demand.
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Notes
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