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Weekly Market Recap


18 March, 2024

 


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. 

Economic and political backdrop

The UK

The unemployment rate in the UK unexpectedly rose from 3.8% to 3.9% in the three months through January. Wage growth, excluding bonuses, fell to 6.1%, the lowest level since mid-2022.

Meanwhile, the UK economy showed signs that it may be recovering from a recession in the second half of 2023. GDP increased 0.2% sequentially in January, bolstered by expansion of retailing and wholesaling. However, GDP fell -0.1% over the three months through January.

Bank of England (BoE) Governor Andrew Bailey said at a Bank of Italy symposium that the UK was “near or at full employment.” He asserted that the UK was experiencing an “unusual” pattern of disinflation with full employment and stated that his concerns about a potential wage-inflation spiral had diminished.

The US

Markets got off to a generally quiet start to the week, as investors awaited the release of consumer inflation data on Tuesday. The Labor Department's consumer price index (CPI) rose 0.4% in February, in line with consensus expectations, but core prices (less food and energy) rose a tick more than expected, also by 0.4%. Investors appeared to take the upside core surprise largely in stride, perhaps because it was due in part to a continued increase in shelter costs, generally considered a lagging indicator of overall inflation trends. Apparel costs jumped 0.6% but remained flat over the past 12 months.

Thursday’s upside producer inflation surprises appeared to cause greater consternation. The producer price index (PPI) rose 0.6% in February, roughly double consensus estimates and the most in six months. While core producer prices rose only 0.3%, this was also slightly more than expected. On a year-over-year basis, headline producer prices were up 1.6%, well above expectations and at the highest level since September. The data appeared to weigh on hopes that low inflation or even deflation in producer prices would eventually flow down to prices paid by consumers.

The stock market’s reaction to the inflation data may have been mitigated by surprising weakness in Thursday’s retail sales report. The Commerce Department reported that retail sales rose 0.6% in February, but the gain missed expectations and was largely due to an increase in gasoline prices (retail sales data are not adjusted for inflation). Notably, online sales also declined -0.1%, marking a sharp deceleration from the 6.4% increase over the past 12 months. Sales at restaurants and bars increased 0.4%, but also at a slower pace, suggesting some growing consumer caution. Indeed, the University of Michigan’s survey of consumer sentiment, released Friday, indicated a modest decline in consumer expectations, with American’s perceiving “few signals that the economy is currently improving or deteriorating,” according to its lead researcher.

Europe

Bloomberg reported that, in an interview Wednesday, Latvian central banker Martins Kazaks suggested that rate cuts were coming soon and stated that “the dragon of inflation is pinned to the ground; a little more and it will be defeated.” Francois Villeroy de Galhau, Robert Holzmann and Pierre Wunsch were among the European Central Bank (ECB) policymakers who argued during the week that an interest rate cut may be needed by June.

T. Rowe Price European Economist Tomasz Wieladek says the ECB has clearly signalled its preference to cut interest rates in June. He sees the potential for the central bank to reduce borrowing costs at every subsequent meeting this year. There are risks that service inflation may pick up, but he believes policymakers will focus on slowing wage growth.

Japan

The likelihood of the Bank of Japan (BoJ) ending its negative interest rate policy in the near term rose with the announcement of the highest average wage rises for members of Japan’s labour unions since the early 1990s. The BoJ is committed to the view that monetary policy tweaks will hinge on the meeting of its 2% inflation target, driven by inflation accompanied by wage growth. Economists’ consensus expectations are now converging around a March or an April interest rate hike.

The BoJ’s ultra-accommodative policy has weighed heavily on the yen, boosting many of the country’s large-cap exporters who derive their revenues from overseas. The yen weakened over the week to JPY 149.0 against the USD from JPY 147.1 at the end of the previous week. The yield on the 10-year Japanese government bond rose to 0.78% from a prior 0.73%, hitting its highest level in about three months in anticipation of the BoJ adjusting its monetary policy settings.

BoJ Governor Kazuo Ueda gave a relatively downcast view of the country’s prospects, stating that while the economy is recovering moderately, weakness has been seen in some data. However, economic growth figures released early in the week showed that Japan had in fact averted a technical recession (marked by two successive quarters of negative growth) in the final quarter of last year. GDP in the fourth quarter of 2023 expanded 0.1% on the quarter compared with the earlier release suggesting the economy had contracted -0.1%. On an annualised basis, this equated to a 0.4% expansion versus a prior fall of -0.4%.

China

China’s CPI rose an above-consensus 0.7% in February from the prior-year period, reversing January’s -0.8% decline and marking the first positive reading since August 2023 as food and services prices increased and consumption surged during the weeklong Chinese New Year holiday. However, the PPI fell a bigger-than-expected -2.7% from a year ago, accelerating from January’s -2.5% drop and marking the 17th monthly decline, the longest streak of declines since 2016, according to Bloomberg. Investors remained cautious on calling a trough to deflation as China grapples with weak domestic demand.

The People’s Bank of China injected RMB 387 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.5%, as expected. With RMB 481 billion in loans set to expire this month, the operation resulted in a net withdrawal of RMB 94 billion from the banking system, the first cash extraction through the liquidity instrument since November 2022.

In other news, the State Council pledged to increase spending by at least 25% by 2027 from last year to encourage consumers and businesses to replace old equipment and goods. The plan aims to benefit sectors such as industry, agriculture, transport, education and healthcare and is seen as a crucial step for Beijing to meet its 2023 economic growth target of 5%, which it unveiled at the National People’s Congress in early March.

China’s new home prices fell -0.3% in February for the eighth straight month, according to the statistics bureau. The data showed no sign of turnaround in China’s property crisis despite Beijing’s attempts to shore up demand. Earlier in the week, Moody’s lowered the credit rating for China Vanke, one of the country’s biggest developers, to junk from investment-grade and said that all of Vanke’s ratings are on review for downgrade. The downgrade by Moody’s for Vanke, a state-backed company, will likely further undermine confidence in China’s property sector.

Australia

The number of payroll jobs in Australia rose in the month to mid-February, although this could be mostly seasonal. The number of monthly net permanent and long-term arrivals, which has been a strong contributor to Australia GDP growth, remained around recent highs in January.



Markets

Last week, the MSCI All Country World Index (MSCI ACWI) lost -0.4% (6.0% YTD).

In the US, the S&P 500 Index moved -0.1% lower (7.6% YTD), as investors weighed upside surprises in inflation data and signs of moderating consumer spending. The Dow Jones Industrial Average held up best among the major indexes, reaching a record high on Wednesday before falling back to end the week. Energy shares outperformed on the back of higher oil prices, while technology shares lagged due to weakness in Nvidia and other chipmakers.

Value stocks fared better than growth shares and small caps lagged large caps. The Russell 1000 Growth Index returned -0.2% (9.0% YTD), the Russell 1000 Value Index -0.1% (5.3% YTD) and the Russell 2000 Index -2.0% (0.9% YTD). The technology-heavy Nasdaq Composite retreated -0.7% (6.6% YTD).

In Europe, the MSCI Europe ex UK Index firmed 0.3% (6.9% YTD). Encouraging corporate earnings and growing hopes that the ECB would lower borrowing costs in June stoked the advance. Major stock indexes gained. Germany’s DAX Index ticked up 0.7% (7.1% YTD), France’s CAC 40 Index increased 1.7% (8.4% YTD) and Italy’s FTSE MIB Index put on 1.6% (12.3% YTD). Switzerland’s SMI Index was up 0.8% (6.1% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.09 for EUR.

In the UK, the FTSE 100 Index rose 1.0% (0.9% YTD) but the FTSE 250 Index gave back -0.4% (-0.4% YTD). The British pound weakened versus the US dollar, ending the week at USD 1.27 for GBP, down from 1.29.

Japan’s stock markets generated a negative return over the week. The TOPIX Index dropped -2.1% (12.9% YTD) and the TOPIX Small Index declined -1.2% (8.4% YTD).

In Australia, the S&P ASX 200 Index dropped -2.2% (2.7% YTD) as strong US payroll data last Friday and a hot US PPI inflation print reinforced bets that the Fed will be in no rush to cut rates. Australian government bond yields rose, with the curve modestly steepening. The Australian dollar weakened against the US dollar as US Treasury yields climbed more than Australian yields.

MSCI Emerging Markets Index closed -0.1% lower (1.4% YTD), with a positive contribution to performance from the stock market of China and a negative contribution from those of Taiwan, India, South Korea and Brazil.

Chinese stocks rose as the government’s recent market stabilisation measures boosted investor confidence despite a weak economic outlook. The Shanghai Composite Index was up 0.3% (2.7% YTD) and the blue-chip CSI 300 Index advanced 0.7% (4.0% YTD). In Hong Kong, the benchmark Hang Seng Index surged 2.3% (-1.5% YTD).

In Brazil, stocks were volatile as investors continued to react to the previous week’s news that state-owned oil giant Petroleo Brasileiro (known as Petrobras) would not pay extraordinary dividends. By retaining funds that otherwise would have been paid out to Petrobras shareholders in the form of dividends, Brazil’s government could use the revenue for its fiscal purposes, creating a natural tension between shareholders and the government. Petrobras is a bellwether stock for Brazil’s market, so the fluctuations in its price generated by investors revising their dividend expectations influenced the entire market.

Brazil reported that its annual inflation rate was 4.5% in February, slightly higher than the median consensus estimate. The country’s sovereign bonds lost ground on the news. While the February inflation data were at the top of the Central Bank of Brazil’s target range, many analysts still expect the central bank to extend its series of rate cuts.

In Argentina, the government exchanged more than USD 50 billion in outstanding peso-denominated debt that is due to mature this year for new, longer-maturity bonds. The debt swap covers about 77% of the country’s peso-denominated notes that were set to mature in 2024, giving the government more breathing room to shore up its finances. While debt exchanges are common in Argentina, this was the country’s largest-ever rollover and was widely seen as a vote of confidence in President Javier Milei’s economic policies.

Argentina also received some good news on the inflation front as consumer prices increased 13.2% in February from January, notably less than the 15% consensus estimate. The combination of better-than-expected inflation data and the completion of the country’s largest domestic debt swap led to strong gains for Argentina’s US dollar-denominated bonds.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.9% (-0.8% YTD), Bloomberg Global High Yield Index (hedged to USD) -0.2% (1.7% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index -0.6% (0.2% YTD).

The US bond market’s reaction to the inflation surprises was pronounced, with the yield on the benchmark 10-year Treasury note touching its highest intraday level (4.32%) since 27 February. Over the week, the 10-year Treasury yield increased 23 basis points (bp) to 4.31% from 4.08% (up 43bp YTD). The 2-year Treasury yield increased 25bp to 4.73% from 4.48% (up 48bp YTD).

The yield spread between German and Italian benchmark 10-year sovereign bonds narrowed significantly due to growing confidence in Italy’s economic policy and increased demand for high yield debt ahead of a likely reduction in borrowing costs later this year. Over the week, the 10-year German bund yield rose 17bp, ending the week at 2.44% from 2.27% (up 42bp YTD).

In the UK, the 10-year gilt yield increased 13bp, ending the week at 4.10% from 3.97% (up 57bp YTD).

US investment-grade issuance was heavy at the start of the week and was also largely oversubscribed. Likewise, high yield bond investors appeared to view the hotter-than-expected CPI number as manageable given the technical backdrop of high cash balances and limited new issuance. Investors seemed ready to use any weakness to add positions. However, the market turned lower along with equities amid broad macro headwinds following the release of PPI data.

Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM

Michael Walsh, FIA, CFA
Solutions Strategist

 

Niklas Jeschke, CFA
Solutions Analyst

 

Eva Wu,
Solutions Analyst

 




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