Central Bank updates, job data and more tech earnings
It was a busy week on all fronts for the financial markets as we heard from the central banks and got important economic updates alongside ‘Big Tech’ earnings continuing to roll in. Equity investors treated the news positively; 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. As has been so often the case of the last 36 months, it was quite a different picture by the end, as investors seem to have returned to their pre-Christmas, glass-half-full disposition. Just as in 2023; Japan, the 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 widely anticipated move. 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 stabilised, reflecting a nuanced view of the likelihood of rate changes from probability to possibility.
Looking ahead, Powell expressed optimism about defeating inflation, leading to market expectations shifting towards more aggressive rate cuts later in the year. Powell emphasised the need for more evidence of sustained improvement in inflation before considering rate cuts. He aims to avoid premature easing and is mindful of past errors, particularly given the 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.
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 sure we will get that as the economy continues to hum; look at the latest Institute of Supply Managers surveys of the manufacturing sector. In the US, new orders and prices unexpectedly turned sharply upward, 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 that the US economy is in good shape, we got the January jobs data that showed US firms added 353,000 jobs, marking the most significant increase in a year, as the Bureau of Labor Statistics’ monthly review reported. 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.
The United Kingdom
As well as hearing from Andrew Bailey 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 emphasised 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. Before considering rate cuts, Pill highlighted the importance of clear evidence of declining inflation, mainly through the labour market and wage dynamics.
The European Central Bank (ECB) is cautiously maintaining interest rates amidst economic challenges within the Eurozone, mainly due to stagnation in Germany and suppressed loan demand caused by high financing costs, despite recognising successes in inflation control. Like the US, this caution is influenced by a tight labour market and the potential risk of underestimating inflationary pressures alongside specific European labour market dynamics.
Market expectations anticipate ECB rate cuts starting this spring, with a forecasted 1.5% decrease by the 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 than the Federal Reserve’s more flexible policy, influenced by its dual mandate, where economic growth also features as part of the target.
Every week, I seem to write the same update on the fact that Chinese equities have had another bad week, fallen further and must bounce soon. This week, it’s 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, but it could also prompt the Chinese government to tackle the ongoing property crisis effectively.
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 oil giants Exxon & Chevron beat earnings expectations, but it was all about the tech giants last week. Ultimately, Big Tech didn’t disappoint. However, there were signs of more discrimination as earnings from Meta and Amazon, two of the ‘Magnificent Seven’, spurred significant stock rallies. This result contrasts 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.
Despite recent scrutiny, Meta announced a $50 billion share buyback and its first-ever quarterly dividend, signalling confidence in its future growth prospects. The company also reported a solid fourth quarter with a 25% increase in sales and tripled profits, exceeding revenue growth expectations. Amazon also saw its shares rise due 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 highly value those companies seemingly able to achieve A.I. monetisation!
There is an upbeat swagger in the Bulls 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 now has a very bullish tone. That said, momentum is firmly behind the market and with a lot of cash in money market funds, ingredients are as ripe for a melt-UP as a melt-DOWN.