Insight | February 19, 2024
Muzinich Weekly Market Comment - February 19th 2024
Weekly Update: What Links Financial Markets and the Super Bowl?
We reflect on the main developments in financial markets last week and consider whether the outcome of the Super Bowl will have any bearing on investments in the coming months.
US government bond yields grinded higher, but “range bound” probably best summarises the price action in most markets last week. The relative calm was perhaps unsurprising considering a large proportion of Asia was on vacation for the Lunar New Year and the US recovered from Super Bowl LVIII between the Kansas City Chiefs and San Francisco 49ers in Las Vegas. The positive and negative aspects of the economic data released last week cancelled each other out. It was a good week for carry strategies.
In Asia, Australian unemployment picked up to 4.1% with only 500 jobs created in January, a further signal policy rates are starting to take effect. However, the main surprise came from Japan, which unexpectedly slipped into a technical recession — two consecutive quarters of contraction — in the fourth quarter. Growth contracted -0.1% quarter-over-quarter (QoQ) versus the consensus view Japan would grow by +0.2%.
The growth report underscored Japan’s reliance on external demand, with both domestic consumption and business investment contracting, and inflationary pressures biting into purchasing power. In our view, this will complicate and possibly delay the exit from the negative rate policy by the Bank of Japan, which has been expected to begin increases in March or April. For the full year, Japan’s economy expanded by 1.9%. Unfortunately, this wasn’t enough to prevent Germany taking its place as the world’s third largest economy in 20231.
UK Recession: It’s Technical
In Europe, the UK took center stage; unemployment unexpectedly fell to 3.8%, and although wage growth continued to fall, it fell more slowly than economists expected. Consumer prices were stable in January (unchanged from December), while headline and core consumer prices rose by 4.0% and 5.1% year-over-year (YoY).
Robust employment data should be welcome news for the Bank of England (BoE); inflation is expected to restart its decline in February as base effects kick in. This news was followed by the headline that the UK has fallen into a technical recession, with growth contracting in the fourth quarter by -0.3% QoQ. A technical recession was the consensus view, but the fourth quarter contraction was bigger than expected with net trade a major contractor. This left the UK economy expanding just 0.1% in 2023. The overnight interest rate swaps market is pricing the BoE to reduce policy rates by 75 basis points (bps) in 2024 starting in August. However, the weak data could put pressure on the BoE to loosen earlier.
In the US, core prices were stable in January (unchanged from December), rising 3.9% YoY. Economists had expected prices to fall to 3.7%, but rising home rents caught forecasters by surprise, increasing 0.6% month-over-month (MoM). This was followed by the release of the retail sales report that indicated a broad decline in spending; nine of thirteen categories posted declines, with the Sales Control Group (used to calculate gross domestic product) contracting -0.4% MoM. The weak report could be attributed to severe weather in January. Alternatively, it could be a sign consumers are finally pulling back amid higher borrowing costs.
Bears, Bulls and Superbowls
One of the arts to investing is separating the signals from the noise. This week, fixed-income bulls will focus on the surprising weakness of growth and consumer data, while - bears will cite the stickiness of the inflation data.
For those interested in the noise, Leonard Koppett, a sportswriter for the New York Times, introduced the Super Bowl Indicator in 19782. The indicator predicts that if the winner of the Super Bowl is from the American Football Conference (AFC), the S&P 500 will decline in the coming year. Conversely, a win by a National Football Conference (NFC) team means the stock market will rise.
From 1967-2015 the indicator had an accuracy rate of 82%. In the last six years, however, the indicator has lost its shine - it was correct only once between 2016-2023, pulling down its success rate to 75%. With the AFC’s Kansas City Chiefs winning, equity bears will be happy.
Chart of the Week: Japan—Unexpected Technical Recession
Source: Bloomberg, as of 16th February 2024. For illustrative purposes only.
1.Bloomberg News, “Japan Economy’s Slide into Recession Prompts Caution on BoJ Bets,” 15th February 2024
2.Forbes, “Super Bowl Indicator Says Market Should Rise in 2022 if Rams Win,” 31st January 2022
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