Weekly Markets Review

2nd April 2024

Markets last week

• Markets were undisturbed in a quiet week, with little excitement on the economic calendar

• Investor confidence remains high; bond yields and currencies were stable, while equities posted mild gains

• Christopher Waller from the US Federal Reserve (Fed) hinted at hesitancy towards rate cuts due to persistent inflation. Fed Chair Powell echoed Waller's sentiments, suggesting that more confidence is needed in inflation moderation before any rate cuts – indicating a shift in the Fed's narrative

• February’s US Personal Income and Spending report revealed moderate Personal Consumption Expenditure (PCE) inflation in line with expectations, alongside robust consumer spending

• Japanese equities experienced a slight pullback following a strong rally after the Bank of Japan’s policy change earlier in March, likely due to profit-taking and repositioning

• European equities continued their positive trend, with a broad-based rally beyond mega-cap stocks. European valuations appear attractive relative to the US market

• Commodity markets performed well, with Gold and West Texas Intermediate (WTI) oil rising over 3%. Gold is trading at an all-time high of US$2229.87/Oz.

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Analysis

Markets were undisturbed in a quiet week. There was little to excite on the economic calendar following a busy week the week before. Sentiment remains positive: bond yields finished the week where they started, currencies were stable, and equities posted mild gains. However, there was still plenty of food for thought.

The first morsel came from Christopher Waller, a known ’hawk’ on the Federal Reserve Open Market Committee (FOMC). In his speech on Wednesday, Waller added a note of hesitancy to the Fed’s interest rate trajectory. Fed Chairman Jerome Powell had previously guided markets to expect interest rate cuts coming into the summer, and suggested that the Fed was close to the level of confidence required to cut rates. Waller struck a more hawkish tone, suggesting that there has been an increase in the dispersion of opinion amongst the FOMC, and adding that they are in no rush to cut rates. The speech did little to move equity markets but there was a mild move higher in US Treasury yields, particularly in shorter dated maturities, and the US dollar strengthened slightly. This reaffirms our view that so long as confidence remains that a significant easing cycle is coming, sentiment should remain firm.

The main event on the economic calendar was February’s US Personal Income and Spending report on Friday, which includes the Fed’s preferred measure of inflation. Although this is an important report, markets were closed on Friday, so the reaction will be seen in the price action this week. Having said that, there was little to move markets in the report. PCE inflation was in line with expectations, ticking up to 2.5% year-on-year from 2.4% in January. Personal spending was robust while income was moderately weak – a pattern that has been consistent for the last 12 months or so.

Powell spoke on Friday following the PCE data and added to the messages from his FOMC colleague Waller, saying that the strength of the US economy “gives us the chance to be a little more confident about inflation coming down before we take the important step of cutting rates”. It seems that the Fed’s narrative around rate cuts heading into the summer is starting to soften slightly, led by the remaining hawks on the FOMC.

Japanese equities retreated last week after a strong performance in the preceding week. The Bank of Japan's decision earlier in March to abandon negative interest rate and yield curve control policies, prompted by a healthy dose of inflation and seemingly sustainable wage growth, fuelled a significant rally in the Japanese stock market. Despite this pullback, the Japanese equity market had shown robust performance throughout the first quarter, anticipating the policy shift and remains up 17% year-to-date in local currency terms. The decline last week was likely driven by investors' repositioning and profit-taking following the policy decision, rather than any fundamental underlying catalyst.

European equities performed well, continuing their positive start to the year. Reassuringly, the rally has broadened out beyond the few mega-cap stocks driving the initial rally. Cyclical stocks are leading the charge with the financials, industrials and consumer discretionary sectors all up strongly year-to-date. The technology sector is also performing well in parallel with the US. Falling inflation in Europe combined with imminent interest rate cuts (in fact, the Swiss National Bank has already cut rates) has helped buoy investor sentiment. European valuations look attractive too, relative to the more expensive US market. In the eurozone, equities are trading on a 14.5x 12-month forward price-to-earnings ratio, considerably cheaper than the US trading on a 21.7x multiple. The UK market is even cheaper, trading on 11.6x.

Commodity markets performed well last week. Both gold and WTI oil rose over 3%. Commodity prices have been steadily rising in recent months and optimism is building for a further rally, particularly in the more cyclical commodities such as industrial metals. This optimism has been built on the back of rate cut expectations and the potential economic revival of China, following a pickup in government stimulus. Gold and oil have both benefitted from geopolitical uncertainties this year too. WTI is up 16.1% year-to-date whilst gold is up 8.1% and trading at an all-time high of US$2229.87/Oz.

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The Week ahead

Wednesday: Eurozone Consumer Price Index

Our thoughts: The preliminary inflation reading for March is expected to show further disinflation, with a drop in headline and core (ex-food and energy) anticipated. Progress on bringing eurozone inflation back to the European Central Bank’s (ECB) 2% target continues and there is much anticipation building for rate cuts within the next couple of meetings. Swaps now price in a 97% probability of a cut by the June meeting. Markets will also be scouring the minutes from the previous ECB meeting, released on Thursday, for further clues on the potential timing and scale of cuts.

Friday: US Employment report

Our thoughts: Unemployment is expected to have fallen slightly in March to 3.8%. 200 thousand new jobs are anticipated to have been created, down from 275 thousand in February but still well ahead of the 100 thousand level that the Fed had previously estimated as the neutral pace of job growth. This would indicate that the labour market remains tight and would make it more difficult to justify an early rate cut.

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