Insight | February 5, 2024
Muzinich Weekly Market Comment - February 5th 2024
Weekly Update: Data Overload
It was a heavy week for earnings, economic data, and central bank meetings. Government bond curves flattened with the long ends outperforming in both the US and Germany. Investment grade corporate credit outperformed, with its weekly performance pushing January’s total return for the asset class into positive territory. Energy prices were 5% lower at the end of the week—news that Aramco is abandoning plans to boost output capacity and OPEC+ is leaving production policy unchanged may have softened sentiment in the energy markets, but the main driver came from the positive news that progress has been made between Israel and Hamas in negotiating a ceasefire. In comparison, equity markets had a quiet week, with most indexes range bound +/- 1%. The exception came from the US regional bank index, after New York Community Bancorp (NYCB) reported a loss and raised their expected loan losses on commercial real estate; a reminder to the Federal Reserve (Fed) on the consequences of running restrictive policy.
In Asia, Australian inflation undershot consensus, printing at 4.1% year-over-year (YoY), below the Reserve Bank of Australia (RBA) year-end forecast of 4.5%. Retail sales surprisingly contracted by -2.7% month-over-month (MoM). The RBA meets on 5th-6th February and investors are expecting a “pivot” to a loosening bias. The Australian interest futures market is currently pricing 65 basis points (bps) of cuts for 2024. In China, the NBS Manufacturing Purchasing Managers Indexes (PMIs) improved from December, but with manufacturing increasing to 49.2 in January, it is still in contraction, while services printed a solid 50.7. The People’s Bank of China (PBoC) announced that it provided a further CNY150bn to policy banks via its Pledged Supplementary Lending (PSL) tool—the PBoC’s quantitative easing tool—and the facility has now grown to CNY3.4tn. China’s increased growth focus on investment should favor Australia, given its commodity richness.
For Europe, good news arrived in the announcement that the region had avoided a technical recession (two consecutive quarters of contraction). The region stagnated in the fourth quarter, resulting in 0% Quarter-over-Quarter (QoQ). Upside surprises to growth came from Portugal, Spain, and Italy, +0.8%QoQ, +0.6%QoQ, and +0.2%QoQ, respectively. Meanwhile, Germany underperformed, shrinking by -0.3QoQ, in line with consensus. Disinflation continued in the region with prices falling -0.4% MoM, allowing both headline and core prices to fall by -0.1%YoY, to 2.7% and 3.3% respectively. The Bank of England (BoE), the major central bank meeting of the week, left its policy rate unchanged; six members voted to remain on hold, two preferred to hike, while one voted for a cut of 25bps, all in line with investor expectations. The BoE did drop its tightening bias stating, “the Committee will keep under review for how long Bank Rate should be maintained at its current level.1”
In the US, five of the Magnificent Seven reported (a market cap greater than US$10tn). Meta was the outperformer, with a blowout quarter, posting 25% gains in sales and profits that tripled. Meta also announced that it will pay its first-ever dividend as well as initiate a US$50bn buyback programme2. The US Treasury announced its quarterly funding needs, lowering Q1 borrowing by US$55bn3. There were no surprises from the Federal Open Market Committee (FOMC), which left policy rates unchanged. Chairman Powell pushed back on the possibility of a March cut, but the Committee removed the policy tightening bias from its monthly statement. The economic data released painted a picture of strength: consumer confidence hit a 2-year high, the manufacturing PMI significantly beat expectations driven by a large rise in new orders, the JOLT (Job Openings and Labor Turnover Survey) report showed openings unexpectedly rising to 9.036mio, Nonfarm Payrolls smashed expectations—creating 317,000 jobs in January—and (likely more concerning for the FOMC), there was uptick in average hourly earnings to 0.6% MoM.
Last week was an absolute overload of information. As the dust settles, we can conclude that China is stimulating its economy in typical Keynesian style with government investment. Everything is on track in Europe for policy loosening to begin by the summer with the risk slightly skewed for an earlier starting point. The debate in the US is moving from soft-landing to no-landing; the latest reading from the Atlanta Federal Reserve GDPNow estimate for Q1 growth is now 4.2%YoY4. The IMF (International Monetary Fund) probably best summarizes the world this week as they upgraded global growth by 0.2% to 3.2%, citing better-than-expected expansion in the US and fiscal stimulus in China, while warning of the risk of war and inflation (see Chart of the Week).
Chart of the Week: US and China Remain the Global Growth Engines
Source: Bloomberg News, International Monetary Fund, 2nd February 2024. For illustrative purposes only.
1.Bloomberg First Word, “BoE Rate Pricing Still Predicated More on Hope Than Reality,” 2nd February 2024
2.Bloomberg News, “Meta Plans $50 Billion Buyback in Effort to Win Over Investors,” 1st February 2024
3.UBS Global Research and Evidence Lab, “Global Rates Strategy,” 29th January 2024
4.GDPNow – Federal Reserve Bank of Atlanta, 1st February 2024
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