Slowdown ? What slowdown ?
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
The Fed’s dousing of hopes for a March rate cut, renewed fears around some regional banks in the US and underwhelming tech earnings meant that stocks struggled in the middle of last week. But indexes recovered after other prominent ‘Big Tech’ names reported later on, leaving the S&P 500 up 1.4%i on the week (in USD), even though strong employment numbers for January seemed to bury the idea of early rate relief. The Stoxx Europe 600 was more subdued, rising 0.9%iii (in euros), while the sell-off of Chinese stocks continued, with the MSCI China down 3.9%ii in USD last week (in part due to a court order to wind down property developer Evergrande).
While US Treasuries sold off after the unexpectedly strong January jobs report that also showed a rise in wage growth, investors seemed unfazed by the Fed’s push-back on the idea of a March rate cut and welcomed a Treasury department issuance schedule that was lighter than expected. Helped by further tremors in the US regional banking system, Treasury yields fell over the week as a whole, with the 10-year US Treasury yields ending at 4.03%. Big falls in inflation in France and Germany fed a rally in European bonds as investors looked to an ECB rate cut as early as April. The Fed’s push-back on rate cuts helped the US dollar, while we saw a big decline in oil prices.
QUOTE OF THE WEEK
Fed Chair Jay Powell on the possibility of a rate cut in March: “[March is] probably not the most likely case or what we would call the base case.”
KEY DATA
January US nonfarm payrolls rose 353,000, far higher than expected and up from an upwardly revised figure of 333,000 in December. The unemployment rate held steady at 3.7%. Average hourly wages accelerated to an annual rate of 4.5% in January from 4.3% in December. The ISM purchasing managers’ index for US manufacturing rose to 49.1 in January from 47.1 in December.
The euro area recorded zero GDP growth in Q4 and 0.5% in 2023 as a whole. Headline inflation in the euro area eased to an annual rate of 2.8% in January (from 2.9%) in December, while core inflation fell to 3.3% (from 3.4%).
The official Chinese purchasing manager index (PMI) for manufacturing rose slightly to 49.2 in January from 49.0 in December, but still showed contraction for the fourth consecutive month.
MARKETS VIEW
Accelerating jobs growth will make the Fed’s decision on when to cut rates harder and we will watch US data closely to assess how much the economy is slowing. In our view, continued disinflation and a weakening labour market would lead to a first cut in June. May is a risk, March unlikely.
Losses at a big US bank highlight the risk of accidents in the market, of which more can be expected, and underline the importance of stock picking this year. The liquidation of a Chinese property developer hit China’s markets and we will watch to see if a fall in prices can abate.
US equities have been led higher by the “Magnificent 7” tech stocks whose earnings per share have outpaced other sectors. Market momentum driven by Q4 earnings can continue but there is little room for disappointment. On bonds, the oversubscription of a Greek issue by more than 10 times underlines our 2024 theme “from cash to duration”.
i Source: Pictet WM AA&MR, Thomson Reuters. Past performance, S&P 500 Composite (net 12-month return in USD): 2019, 31.5%; 2020, 18.4%; 2021, 28.7%; 2022, -18.1%; 2023, 26.3%.
ii Source: Pictet WM AA&MR, Thomson Reuters. Past performance, STOXX Europe 600 (net 12-month return in EUR): 2019, 27.6%; 2020, -1.5%; 2021, 25.5%; 2022, -10.1%; 2023, 16.5%.
iii Source: Pictet WM AA&MR, Thomson Reuters. Past performance, MSCI China (net 12-month return in USD): 2019,23.7%; 2020, 29.7%; 2021, -21.6%; 2022,-21.8%; 2023, -11.0%
