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    Weekly multi-asset update: February

    Weekly multi-asset update: February

    16 February 2024 Multi-asset
    Week to 16 February 2024

    Summary

    • Disinflation narrative hits a speed-bump as US CPI comes in above expectations, Treasuries sell-off.
    • US growth data provides mixed signals; growth backdrop remains supportive for risk assets for now.
    • UK economy falls into a technical recession; Bank of England (BoE) views fall in CPI as “encouraging” step, but further falls required.
    • Mixed growth story in Europe leads European Central Bank (ECB) to emphasise sustainable fall in inflation required before rate cuts.
    • Next Week: Fed and ECB minutes, global PMIs and Nvidia earnings likely to take centre stage.

    Weekly Review

    Disinflation narrative hits a speed-bump as inflation prints come in above expectations, Treasuries sell-off

    The consensus view that inflation was proceeding smoothly back to policy targets was called into question this week as US headline CPI rose by a higher than expected 0.3% in January. Although the year-on-year change moderated to 3.1% from 3.4% it was above consensus expectations of a move to +2.9%. Combined with the strong non-farm payrolls for January, the report raised questions on whether growth is slowing enough to enable the Fed to sustainably reach their 2% target.

    The likelihood of a March rate dropped from 18% to 11% as markets removed 25bp of expected cuts in 2024. There is only 90bp of cuts priced for 2024, approaching the 75bps of cuts expected by the Fed, down from 168bps of cuts priced as recently as 12th January.

    The PPI report released on Friday (that has a closer fit with Fed’s preferred PCE measure of inflation) added to these concerns, with a month-on-month increase of 0.5% (excl. food and energy) versus expectations for a 0.1% increase. The University of Michigan 1-year inflation expectations also came in above the 2.9% consensus at 3.0%. 

    10 year Treasury yields rose 13bps after the CPI print to 4.32%, the highest level since late November. Fed rhetoric pushed back, with Chicago Fed President Goolsbee stating that he does not “support waiting until inflation at 2%” before cutting rates. 10-year Treasury yields then rallied before the PPI print sent them back to c.4.30% (13bp higher over the week) at the time of writing.
     
    US growth economic data provided mixed signals; growth backdrop remains supportive for risk assets for now

    In contrast to the strong non-farm payroll print two weeks ago, US retail sales fell 0.8% in January, against an expected decline of 0.2%. The larger-than-expected drop occurred despite a downward revision to December's data in the weakest report since March. Industrial production for January also came in below expectations, falling 0.1% over the month (+0.2% expected), suggesting a potential loss of growth momentum at the start of the year. In contrast, the US February Philadelphia Fed Business Outlook surprised to the upside, with +5.2 (vs. -8.1 expected), up from -10.6. The supportive growth backdrop and reasonable earnings releases also helped equity markets, as the S&P largely shook off the CPI surprise to recover in the second half of the week. The ‘magnificent seven’ were not all pulling in the same direction with Tesla rallying and Nvidia and Alphabet giving up some of their recent gains. Elsewhere, oil prices continued to firm up over the week, despite the International Energy Agency trimming its 2024 outlook for demand.

    UK economy falls into a technical recession; Bank of England views fall in CPI as “encouraging” step, but further falls required

    In the UK, the Office for National Statistics data showed the UK economy fell into a technical recession during the final three months of the year, with GDP contracting by a larger than expected -0.3% in Q4 (vs. -0.1 expected), primarily driven by weak consumption and net trade. In turn, we saw the expected 2024 BoE rate pricing fall intraday before quickly reversing shortly after and markets pricing 75bp cuts by December 2024. UK CPI rose 4.0% YoY (vs. 4.1% expected), and core by 5.1% (vs. 5.2% expected). Meanwhile services inflation increased by 6.5%, less than expected by the BoE (6.6%) and consensus forecasts (6.8%). BoE Governor Bailey commented that these figures were "encouraging" but maintained they would need more evidence of wage moderation before making any rate cuts. Bailey also noted that the outcome is "not compatible with a 2% target."

    Mixed growth story in Europe leads European Central Bank (ECB) to emphasise sustainable fall in inflation required before rate cuts

    In the eurozone, Eurostat data revealed economic growth flatlined in Q4 2023 as expected, narrowly escaping a technical recession following Q3's contraction of 0.1%. But the details indicated that Q4 job growth was still strong (+0.3% QoQ). In addition, the industrial production for December came in higher than predicted at +2.6% month over month (vs. -0.2%), mostly because of skewed data from Ireland. Despite evidence of weaker growth, ECB President Lagarde stated the "current disinflationary process is expected to continue, but the Governing Council needs to be confident that it will lead us sustainably to our 2% target". Markets are now pricing in around four 25bp rate cuts for 2024, down from six in recent weeks, amid growing acceptance that the easing cycle will be slower than previously expected. Against this backdrop, European government bonds ended the week flat.
     
    Next Week: Fed and ECB minutes, global PMIs and Nvidia earnings likely to take centre stage

    Next week, investors will focus on the thinking from both the Fed and the ECB as the minutes from their most recent policy meetings will be released. Notable economic data includes global flash PMIs on Thursday, with a focus on whether the rebound in PMIs for key European countries sustains. Europe will feature Q4 GDP details for Germany, the Ifo survey on Friday, and the ECB's consumer expectations survey. Earnings-wise, Nvidia's results on Wednesday will obviously be a key focus, given its recent equity price surge. Additionally, Walmart, Home Depot, BHP, Rio Tinto, Glencore, Anglo American, Nestle, Mercedes-Benz and Iberdrola all report.
    Week to 09 February 2024

    Summary

    • Central bank rhetoric supports shift in market tone towards fewer rate cuts in 2024, March cut in the US looks unlikely.
    • Shift in tone from policymakers pushes government bond yields, elevated supply levels are met by strong demand.
    • Equity markets rally on continued optimism of a soft landing and some rate cuts, albeit slower than previously expected.
    • Next Week: Markets will primarily focus on Inflation data from the US, UK and Europe; corporate earnings continue.

    Weekly Review

    Central bank rhetoric supports shift in market tone towards fewer rate cuts in 2024; March cut in the US looks unlikely

    Following on from the strong non-farm payroll release in the US late last week, Federal Reserve Chairman Powell reinforced the message that rate cuts were unlikely in March and that the Fed will likely move more slowly than the market expects. Several Fed presidents backed this view, with Cleveland Fed president Mester stating that “it would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%”. Next week’s US CPI print will provide a signpost on that journey. The market is now pricing in 100-125bp of rate cuts this year, down from 150bp a few weeks ago, with March’s potential rate cut effectively ruled out. Philadelphia Fed president Harker struck a positive tone saying that the Fed’s approach had put the economy “on the path to a soft landing”. If realised, this would continue to provide a very supportive environment for more cyclical or risk assets, benefiting the Fund’s more cyclical bias at present.

    Noises from the European Central Bank were of a similar tone as to the pace of any cuts, with policymaker Schnabel cautioning that it was too risky to lower rates currently, noting that “inflation can flare up again”. She pointed to average wage growth of around 5% across the eurozone, which she said could lead to a rise in headline inflation.

    Shift in tone from policymakers pushes up government bond yields; elevated supply levels are met by strong demand

    Given the more cautious tone from policymakers, the German 10-year bund yield rose by about 10-15bp to 2.35% over the week, a move replicated in other major eurozone bond markets. Accordingly, the Italian 10-year BTP climbed to 3.90%, while the French 10-year OAT traded up to 2.9%. Both the US 10-year and two-year yield were up about 10bp over the week, to 4.17% and 4.48% respectively, their highest levels for almost two months. The US Treasury launched its largest single auction of 10-year government bonds ($42bn) at a lower-than-expected average yield of 4.093%, an indication of solid demand from institutions.

    Gilt yields followed other major global bond yields higher with 10-year gilt yields rising 15bp to 4.1%. The UK also saw improvement in forward looking indicators such as January’s services purchasing managers’ index that was revised higher from 53.8 to 54.3, its highest level for eight months. On the inflation front, a widely followed survey by KPMG showed that employment trends were slowing and that growth in starting salaries was at a near three-year low, easing labour market inflationary concerns.

    Equity markets rally on continued optimism of a soft landing and rate cuts, albeit slower than previously expected

    Equity markets broadly rallied, despite the delay in rate cut hopes. Over the last few weeks, investors have fully adjusted their expectations for a Fed funds rate cut to occur in May instead of March, with Fed chair Powell’s most recent comments proving emphatic. Despite this, the S&P 500 set a new all-time high and the Euro Stoxx 50 established a 23-year high on strong earnings reports. The rise in equities occurred despite rising concerns about the state of the smaller US regional banks, especially New York Community Bancorp (NYBC), that continues to come under pressure, nearly twelve months on from the events that led to the collapse of SVB and Signature Bank amongst others.

    In Asia, China’s market rallied after recent weakness following new stimulus measures from the government. Conversely, the FTSE 100 fell on some weak earnings data. Oil prices traded higher on failed peace talks between Hamas and Israel, along with lower-than-expected US crude oil inventories.

    The Fund's pro-cyclical bias in its positioning has proved beneficial, as expectations for a continuation of moderating inflation may allow central banks to cut rates and ease financial conditions, supporting a more benign growth outlook. This remains our base case for now, although we continue to monitor the macro-economic environment closely for any signs that this may not materialise.

    Next Week: Markets will primarily focus on inflation data from the US, UK and Europe; corporate earnings continue

    The market will undoubtedly focus on the latest US CPI report on Tuesday to gain further insight into the timing of the first rate cut from the US Federal Reserve. Headline CPI is expected to continue to moderate, with core relatively stable. There will also be an update on the US consumer, with retail sales (Thursday) and the University of Michigan consumer survey (Friday) providing a top-down view and earnings’ statements from the likes of Coca-Cola and Kraft Heinz providing a bottom-up view. UK CPI and retail sales will provide a similar update, with labour market data completing a data-heavy week in the UK. Eurozone Q4 GDP will be released on Friday. The political calendar is going to be a constant theme this year and next week is no exception with the general election in Indonesia. In addition to those named above, corporate earning updates will come from Airbus, Eni, Sony and Cisco.

    Week to 02 February 2024

    Summary

    • Treasury yields ease on the back of mixed economic reports and Federal Reserve caution on near-term rate cuts
    • Eurozone bond yields fall over the week before rallying on January’s inflation data; UK yields also fall after the Bank of England (BoE) cut its inflation forecast
    • Equity markets recover late in the week despite Federal Reserve caution
    • Next Week: Pivotal inflation data from the Fed and China, European Central Bank (ECB) consumer expectations and continuing corporate earnings

    Weekly Review

    Treasury yields ease on the back of mixed economic reports and Federal Reserve caution on near-term rate cuts

    Having risen above 4.15% late last week, the 10-year Treasury yield fell below 3.9% before selling off to 4.0% after the stronger than expected non-farm payroll print. The Fed left rates unchanged at its most recent conference, marking the fourth consecutive meeting without a policy rate move. Yields had jumped briefly on Fed Chairman Powell’s statement that rates were unlikely to be cut in March before falling back as he reassured investors that the outlook for inflation and employment had improved and rate cuts were likely later in the year. NY Community Bancorp (NYCB) noted that their loan-loss provisions reached $552m, largely as a result of their acquisition of Signature Bank last year. Other regional banks suffered as a result, and the KBW Regional Banking Index dropped -6.00%, its worst daily performance since the turbulence in March last year.

    In terms of data, the ISM manufacturing print showed some positive news, increasing to a 15-month high of 49.1 (above 47.2 forecast). The non-farm productivity growth in Q4 exceeded forecasts, with an annualized rate of +3.2% (as opposed to +2.5% projected) both of which supported the soft landing and resulted in the Atlanta Fed's most recent GDPNow estimate for Q1 coming in at an annualized growth rate of 4.2%. The Non-Farm payroll number was much stronger than expected at +353k, well above consensus estimates of +185k and was accompanied by upward revisions to the prior release as well. Hourly earnings were above expectations and the overall unemployment rate fell to 3.7%. All this supports a stronger, more resilient economy and, if accompanied by a continued drop in inflation would permit risk assets to perform strongly.

    Eurozone bond yields fall over the week before rallying on January’s inflation data; UK yields also fall after the Bank of England (BoE) cut its inflation forecast

    The German 10-year bund yield dropped over 15bp to below 2.15% by late Thursday, before recovering on Friday, following data that showed January’s eurozone core inflation falling (to 3.3% from 3.4%) but remaining above market expectations. Headline inflation in the eurozone also eased marginally from 2.9% to 2.8% and was in line with expectations. Although core inflation has reached its lowest level since March 2022, the slower decline has raised concerns about how quickly the ECB would be able to cut rates. Euro Area unemployment rate stayed at 6.4% in December, marking the joint-lowest level since the creation of the single currency. Elsewhere in the region, the eurozone governments raised a total of €73bn in January directly from investors – a record level for syndicated loans – and reflective of huge investor appetite ahead of likely central bank rate cuts later this year.

    The 10-year gilt yield fell from over 4.0% at the end of last week to below 3.8%. The BoE made no change to the level of interest rates, as had been expected by the market the votes were split with 2 members voting for a hike, one for a cut and the rest for no change. BoE Governor Bailey stated that they “need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates”. The BoE did, however, lower its inflation forecast for this year.

    Equity markets recover late in the week despite Federal Reserve caution

    Share prices in the US, Europe and the UK rallied in the final days of the week on signs of better growth in the US. Before that, expectations of a longer wait for rate cuts and had caused markets to slide although the German Dax and French CAC 40 indices touched new all-time highs. We saw Apple, Amazon, and Meta beat earnings estimates over the week and market reacting positively in extended trading. Meta experienced a spectacular increase of around 15% as the business revealed more share buybacks and its first-ever dividend, along with sales projection for the first quarter that was substantially beyond analysts' estimates. Amazon increased by 7% and reported a good first-quarter profit estimate. Investors seemed to applaud both firms for their cost management efforts. In contrast, Apple's stock fell over 3% during after-hours trading because of a worsening decline in Chinese sales, overshadowing the otherwise unremarkable performance. Oil prices declined mildly as hopes grew of a ceasefire in Gaza. The gold price rose to its highest level this year as the US dollar firmed on the Fed’s guidance on rates.

    Next Week: Pivotal inflation data from the Fed and China, ECB consumer expectations and continuing corporate earnings

    In the upcoming week, the focus in the US will be on the Fed's Senior Loan Officer Opinion Survey, providing insights into bank lending standards. Key economic indicators include the ISM services index, trade balance, and consumer credit data. Attention will also turn to Treasury Secretary Yellen's testimony to the Senate Banking Committee and the Democratic presidential primary in South Carolina. In Europe, economic activity in Germany takes centre stage with indicators like industrial production, factory orders, and the trade balance. Japan faces a busy week with crucial releases on wages, bank lending, trade balance, and the Economy Watchers survey. China will be closely watched for inflation indicators, including the CPI and PPI. Corporate earnings season will be in full swing, with the likes of Disney, Caterpillar, Ford, McDonald's, Unilever, Eli Lilly, AstraZeneca, BP and Toyota.

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