Muzinich Weekly Market Comment: The thrill has gone…for now

September 16, 2024

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

In our latest roundup of the key developments in financial markets and economies, we explain why the eerie calm last week may not last for long.

Last week was a letdown for thrill-seeking investors. Volatility was down, government bond yields edged lower and credit markets delivered positive returns, with US investment grade the outperformer.

The US dollar remained stable, industrial metals and energy prices recovered after their recent selloffs and gold reached a new high of over US$2,560 per ounce.^[1] Meanwhile, equity markets posted solid returns, led by technology stocks, with the “Magnificent Seven” gaining 7%.

China gets export bounce, but growth fears remain

China's August trade data suggests global consumption remains robust, with exports growing 8.7% year-on-year.^[2] Vehicle exports hit a new high, and trade with nearly every market increased, with double-digit growth in shipments to the European Union, India and Brazil.

Despite renewed concerns about trade wars, Chinese exports to the US grew at their fastest pace in two years. China is once again exporting goods deflation, as companies cut prices to secure sales, evidenced by shipment volumes rising faster than the value of exports in recent months.

Buoyant exports are acting as a buffer to weak domestic demand in China, as shown by disappointing import data. Imports grew by only 0.5% year-on-year, a sharp decline from the 7.2% gain in the previous month and well below consensus estimates.

Fears over the loss of growth momentum since the end of Q2 have reached the highest levels of the Chinese Communist Party. On September 12, President Xi Jinping called on officials to do everything possible to ensure the country meets its official 5% growth target, stating: "All regions and departments should studiously implement the major economic initiatives and measures introduced by the Central Committee and deliver on the economic tasks for the third and fourth quarters."^[3]

ECB delivers

There were no surprises from the European Central Bank (ECB), which delivered the anticipated 25 basis points (bps) rate cut at its monetary policy meeting on September 12. This brought the deposit rate down to 3.5%.^[4] The ECB struck a balanced tone in its policy statement, with growth projections slightly lowered by 0.1% across the forecast horizon and headline inflation left unchanged.

At the press conference following the meeting, ECB President Christine Lagarde reiterated again that future cuts will be data dependent. For markets, the direction of policy is clear; the debate is more one of timing.

The overnight interest rate swap market slightly favours a pause at the ECB’s next policy meeting in October, implying only a 44% chance of an additional 25bps cut.^[5] However, the swap curve is currently pricing in an 82% probability of a 50bps cut in December.

Fed cut: 25 or 50?

Similarly, US investors continue to speculate whether the Federal Reserve will begin its easing cycle with a 25bps or 50bps cut at the September 17-18 meeting of the Federal Open Market Committee (FOMC). August’s consumer price data, released on September 11, was the last key variable that could influence the decision.

When the data came in, it may have caused some head scratching among FOMC members. On the plus side, headline consumer prices increased by 0.19%, bringing the year-on-year gain to 2.5%, in line with expectations and the lowest increase in almost three years.^[6]

However, core prices unexpectedly rose 0.28% month-on-month, compared to July’s 0.17% increase and a consensus of 0.2%, leaving the rolling twelve-month core price increase unchanged at 3.2%. The surprise in core prices came from the strength in owners' equivalent rent, which accelerated to 0.5% month-on-month, which might bolster the argument for a cautious approach to rate cuts.

Regardless of the FOMC’s decision, interest rate markets expect 100bps of cuts by year-end (see Chart of the week). If the 50bps cut does not happen in September, the market believes such a move is highly likely in November with another 50bps cut expected in December.

Interest rate volatility is expected to continue through year end and any weak data could see a reaction in the prices of risk assets. Last week may have been quiet, but there could be plenty of thrills and spills ahead.

Chart of the week: Is Fed behind the curve?

Source: Bloomberg, as of September 13, 2024. For illustrative purposes only.

Past performance is not a reliable indicator of current or future results.

[1] Trading Economics, September 13, 2024
[2] General Administration of Customs of the People’s Republic of China, ‘Total Export & Import Values,’ September 11, 2024
[3] Bloomberg, ‘Xi Urges Efforts to Hit 5% Growth Target Amid Rising Doubts,’ September 12, 2024
[4] European Central Bank, September 12, 2024
[5] Bloomberg, as of September 13, 2024
[6] US Bureau of Labor Statistics, September 11, 2024

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of September 16, 2024, and may change without notice. All data figures are from Bloomberg, as of September 13, 2024, unless otherwise stated.

--------

Important Information

Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC. Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2024-08-16-14252