Central Bank updates, Job data and more Tech Earnings
Market Overview: It was busy week on all fronts for the financial markets as we heard from the Central banks, got important economic updates and Big Tech earnings continued to roll in. By and large the news was treated positively by equity investors, bonds weakened a little and Oil fell as tensions eased in the Middle East. At the midpoint of January, it looked as if we were set for a tough first month of 2024. It was quite a different picture by the end, as investors seem to have returned to their pre Christmas, glass half full disposition. As in 2023, Japan, US & India have led the charge and China isn’t even bringing up the rear, as its woes continue.
The Fed Update
The Federal Reserve is unlikely to reduce the fed funds rate at its next meeting in March, as Chair Jerome Powell has indicated that a rate cut does not form the central scenario for the immediate future. This position was somewhat unexpected, particularly as the official statement from the Federal Open Market Committee (FOMC) dropped its previous inclination towards rate hikes, a move that was widely anticipated. Despite initial fluctuations in expectations for a March rate adjustment, with implied probabilities shifting significantly throughout the day, the end-of-day figures suggested that expectations had stabilized, reflecting a nuanced view on the likelihood of rate changes from probability to possibility
Looking ahead, Powell expressed optimism about defeating inflation, leading to a shift in market expectations towards more aggressive rate cuts later in the year. Powell emphasized the need for more evidence of sustained improvement in inflation before considering rate cuts. He aims to avoid premature easing, mindful of past errors, particularly given the current robust employment market. He suggested that, once convinced, the FOMC is prepared to implement several rate reductions this year, as indicated by the median forecast of three cuts in the FOMC’s projections.
It would appear that while the recent data on core inflation aligns with the Fed’s targets, more time and consistently benign inflation readings are required before the Fed can confidently initiate rate cuts. I am not so sure we will get that, as the economy continues to hum along, just take a look at the latest Institute of Supply Managers surveys of the manufacturing sector. In the US, new orders and prices unexpectedly turned up sharply, suggesting that the sector wasn’t contracting, and that some inflationary pressures might still be around. The proportion of businesses complaining about rising prices was the highest in nine months:
Adding further to the evidence the US economy is in good shape, we got the January jobs data that showed , US firms added 353,000 jobs, marking the largest increase in a year as reported by the Bureau of Labor Statistics’ monthly review. Additionally, the job growth figure for December was significantly revised upwards. These developments indicate a renewed acceleration in hiring, which is expected to postpone potential reductions in interest rates for now.
UK
As well as hearing from Andrew Bailiey last week after the split decision that left rates unchanged, we also heard the thoughts of Bank of England Chief Economist Huw Pill, which added a bit more colour. He indicated that a decrease in interest rates is not imminent, even though there are signs that the peak in borrowing costs might have been reached. After a divided decision to keep the key rate at 5.25%, Pill emphasized the need for a continued restrictive policy to combat inflation effectively. His comments led to a reduction in investor expectations for significant rate cuts within the year.
Although the Bank of England (BOE) suggests that lower rates may soon be necessary to avoid a recession, with forecasts showing a potential 18-month recession under constant rates, any changes are contingent on inflation trends. Pill highlighted the importance of clear evidence of declining inflation, particularly through labour market and wage dynamics, before considering rate cuts.
Europe
The European Central Bank (ECB) is cautiously maintaining interest rates amidst economic challenges within the Eurozone, particularly due to stagnation in Germany and suppressed loan demand caused by high financing costs, despite recognizing successes in inflation control. Similar to the US, this caution is influenced by a tight labour market and the potential risk of underestimating inflationary pressures, alongside specific labour market dynamics in Europe.
Market expectations anticipate ECB rate cuts starting this spring, with a forecasted 1.5% decrease by end of 2024, encouraged by recent lower-than-expected inflation data. However, inflation within the services sector, linked to wages, remains a concern for the ECB, suggesting continued prudence. Contrastingly, Europe’s focus on price stability suggests a more conservative approach to rate adjustments compared to the Federal Reserve’s more flexible policy, influenced by its dual mandate where economic growth also features as part of the target.
China
It would seem every week I write a little update on the fact that Chinese equities have had another bad week, fallen further and must surely bounce soon. This week its no different after another bout of selling proving that cheap can always get cheaper. The catalyst this time, the struggling real estate behemoth Evergrande was ultimately pushed into liquidation by a court in Hong Kong. This development may lead to more immediate challenges for China’s real estate-driven economy, though it could also prompt the Chinese government to effectively tackle the ongoing property crisis. But the reason, as for all falls in share prices, was more sellers than buyers, as investors are increasingly turning to overseas equities, with a record $2 billion flowing into exchange-traded funds (ETFs) that target foreign markets, excluding Hong Kong, in January alone. Despite the higher risks, including significant premiums on ETFs and potential market corrections, the allure of foreign markets remains strong due to domestic challenges and capital controls in China.
Chinese ETFs, part of the qualified domestic institutional investor program, have seen prices soar, creating a risk of losses if overseas markets correct and premiums vanish. Despite these risks and attempts to cool the market, demand for these investment vehicles continues unabated, highlighting investors’ desperation for alternatives to the local market. Let’s hope the New Year on February 10th can bring a change …
Finally US Earnings …..
Factset Data : For Q4 2023 (with 46% of S&P 500 companies reporting actual results), 72% of S&P 500 companies have reported a positive EPS surprise and 65% of S&P 500 companies have reported a positive revenue surprise.
Under the radar, as if no one seems that interested both of the oil giants Exxon & Chevron beat earnings expectations, but it was all about the tech giants last week. In the end, it would just about be fair to say that Big Tech didn’t disappoint last week, although there were signs of more discrimination as earnings from Meta and Amazon, two of the ‘Magnificent Seven’, spurred significant stock rallies. This contrasting with Google and Apple, which faced a setback due to a sales decline in China, though this did not significantly dampen the overall market enthusiasm.
Meta announced a $50 billion share buyback and its first-ever quarterly dividend, signalling confidence in its future growth prospects despite recent scrutiny. The company also reported a strong fourth quarter with a 25% increase in sales and tripled profits, exceeding revenue growth expectations. Amazon also saw its shares rise, attributed to strong sales and an optimistic operating income outlook, reflecting CEO Andy Jassy’s cost-cutting measures and a profitable focus on services. Despite mixed reactions to the ‘Magnificent Seven’s earnings, Meta and Amazon’s results demonstrate investor readiness to value highly those companies seemingly able to achieve A.I. monetization!
There is an upbeat swagger in the Bull’s at the moment and the sense of invincibility is becoming of moderate concern as we all know that pride comes before a fall. Another contrarian indicator has started to flash amber warnings as the survey produced by the Association of American Individual Investors has a very bullish tone to it now. That said, momentum if firmly behind the market and with a lot of cash sat in money market funds ingredients are as ripe for a melt up as a melt down.
