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Weekly Market Update · 02.13.24

Global Stocks Rise with U.S. Boost, U.S. Inflation Expected to Slide

Earnings momentum of mega-cap U.S. tech companies have supported the equity rally. Investors likely will eye inflation closely to gauge Fed rate cuts this year.

  • Markets & Economy
  • Economic Insights & Trends
  • Federal Reserve
  • Market Views

Key Points

What it is

We review how key events from last week affected markets and highlight what could impact markets this week.

Why it matters

Strong earnings momentum from U.S. mega-cap tech stocks has boosted fourth-quarter earnings expectations.

Where it's going

We think the U.S. economy’s continued strong showing has sparked worries about the extent of Fed rate cuts this year.

Last Week Review

 

Global equities rose 1.0% last week, bringing the year-to-date gain to 3%. U.S. equities rose 1.5%, with the S&P 500 Index closing above the 5,000 mark for the first time ever. Emerging market equities gained 0.6% with support from a 2.9% bounce in China, while developed ex-U.S. equities were flat. The two-and 10-year Treasury yields rose around 0.12% to 0.16%, resulting in a 0.8% loss for investment-grade bonds.

 

U.S. Economy Resilient

Strong U.S. economic data has supported the outlook for growth, but also added to risks of stubborn inflation. Since the Friday before last week, Treasury yields have risen around 0.25%. indicated that expectations for Federal Reserve rate cuts in 2024 have been reduced to 4.5 from 6.3 at the start of the year. Fed speakers have maintained a somewhat balanced approach to the outlook, but last week a March cut was effectively ruled out in publicly televised commentary by Fed Chair Jerome Powell. Bank survey data showed that credit remains tight but may be turning the corner. On balance, lending standards remained tight and credit demand weak, but to a lesser degree than before. The Institute for Supply Management services accelerated to 53.4, including strong new orders and prices paid.

 

Stocks in China Rise on Market Intervention

China equity markets bounced last week on signs that policy officials are taking steps to combat stock market declines. China reported deflation of 0.8% year-over-year based on the Consumer Price Index, more than expected. Producer prices declined even more steeply at 2.5%. Deflationary dynamics and related growth pressures more broadly have coincided with China equities moving about 60% off their 2021 high. Persistent stock market and economic weakness have raised investor hopes that policy officials will step in with meaningful stimulus.       

 

U.S. Earnings Trend Positively

U.S. equities have rallied behind improved fourth quarter earnings. With two-thirds of S&P 500 companies reporting fourth quarter earnings, aggregate earnings growth is on pace to finish up about 3% year-over-year. Revenue growth is tracking at about 4%. Strong earnings from mega-cap technology stocks have helped push earning growth expectations firmly into positive territory, helping offset weak results from the financials sector early on.

 

 

This Week Preview

 

U.S. Inflation Expected to Ease

With the futures market pricing nearly 5 rate cuts this year and recent U.S. economic data showing little slowdown, Tuesday’s inflation data (Consumer Price Index) should garner a lot of attention. January inflation is expected to ease to 2.9% year-over-year, from 3.4% in December, with core inflation expected to come down to 3.7% from 3.9%.

 

Middle East Risks Remain

Financial markets have largely shaken off potential headwinds stemming from conflict in the Middle East. Since the onset of the Israel-Hamas war in early October last year, brent oil prices have moved roughly 3% lower, natural resource equities are roughly flat and global equities are up 15%. Global container shipping costs are around 2.5 times higher, with the increase for some routes even more. We think investor  is predicated on the belief that the conflict will remain contained and ultimately resolve with little impact on global growth and inflation. As negotiators work toward de-escalation, Middle East risks remain worth monitoring.

 

 

Source: Bloomberg for data, news developments and schedule of economic releases. Data as of February 11, 2023.

Main Point

Investors Flagging on Fed Rate Cut Expectations

The 10-year Treasury yield has surged over the past week as investors have adjusted their expectations of how aggressively the Federal Reserve will cut rates in 2024. The U.S. economy continues to show resilience, with fourth-quarter earnings of companies in the S&P 500 Index on track to rise 3% from a year ago on a 4% increase in sales.

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