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Weekly Market Update · 01.09.24
Markets Start 2024 Sluggish, Slight Increase Expected for Fourth Quarter U.S. Earnings
The sluggish start follows a strong December and 2023. As fourth quarter U.S. earnings kick off with banks this week, investors expect tepid results for the broad market.
- Markets & Economy
- Economic Insights & Trends
- Central Banks
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
The U.S. jobs and European inflation reports last week may influence central bank decisions.
Where it's going
Estimates show that fourth-quarter U.S. earnings may rise only 1% on a 3% increase in sales.
Last Week Review
Bonds and stocks had losses last week interest as rates increased. The sluggish start to 2024 comes on the heels of a strong finish to what was a remarkable year for financial markets in 2023. In December, interest rates continued to move lower amid easing price pressures and expectations of a Federal Reserve pivot to lower rates in early 2024. Meanwhile, the U.S. economy continued to show resilience. Global equities increased 5.3% in December, with all three major regions up and an improvement in breadth within the U.S. markets. On the fixed income side, investment grade gained 3.8% and 2- and 10-year Treasury yields fell roughly 0.45% lower. Global real estate was also a standout performer — up 9.2% — with support from lower interest rates and expectations for non-recessionary activity.
Fed Recognizes Progress on Inflation, Potential for Rate Cuts
The December Fed minutes contained no major surprises. Fed officials recognized inflation progress and the potential for rate cuts this year, but overall the minutes leaned against dovish market pricing regarding the timing of cuts. In the leadup to last week’s U.S. jobs report, U.S. economic data was broadly supportive of continued disinflation. The U.S. manufacturing ticked up, but remains contractionary. Also, The U.S. data suggested continued normalization in the U.S. labor market. Job openings, the quits rate and hires rate all moved lower.
U.S. jobs Report Stronger Than Expected
Despite meaningful downward revisions to prior jobs added, we think the December jobs report was solid. Companies added 216,000 jobs, more than the 173,000 expected. The unemployment rate was unchanged at 3.7% and wages grew 0.4% month-over-month (4.1% year-over-year). The participation rate declined to 62.5% from 62.8%, but most of the increase was concentrated outside of the prime working ages.
European Yields Rise on Inflation
Flash Europe inflation was in-line with expectations. Inflation was 2.9% year-over-year versus 2.4% prior and core inflation, which excludes more volatile energy and food prices, decelerated to 3.4% from 3.6%. Euro area government bond yields moved higher following the release. Investors see the odds of a European Central Bank rate cut in March as roughly even, with an 86% chance by April, based on the futures market.
Middle East Tensions Escalate
There were several developments last week that drew attention to geopolitical tensions stemming from the Middle East. Among them, a senior Hamas leader was assassinated, and Iranian-backed Houthi rebels continued to ramp up attacks on shipping vessels in the Red Sea. Roughly 12% of global trade transits the Red Sea and persistently higher shipping rates resulting from re-routing away from the area could complicate inflation. Investors will continue to analyze these risks — in the Red Sea and broader Israel-Hamas conflict — for any growth and inflation impacts.
This Week Preview
U.S. Inflation Release on Thursday
Inflation is expected to rise to 3.2% year-over-year from 3.1%, while core inflation is expected to decelerate to 3.8% year-over-year from 4.0%. Beyond the inflation data, policy officials from the Fed and European Central Bank are scheduled to speak throughout the week. Investors will listen in for any pushback against market expectations for rate cuts.
Major U.S. Banks to Report Fourth Quarter Earnings
JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) are scheduled to report earnings this week. For all companies in the S&P 500 Index, investors expect aggregate earnings to rise 1% year-over-year on a 3% rise in sales. This would put 2023 at just under 1% versus growth of about 12% expected in 2024.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of January 7, 2024.
Job Openings and Labor Turnover Survey (JOLTS)
The Job Openings and Labor Turnover Survey is a monthly report by the U.S. Bureau of Labor Statistics on total employment, job openings and hires along with quits, layoffs, discharges and other separations.
Purchasing Managers Index (PMI)
The PMI provides insights into the current trends and future direction of economic activity in the manufacturing and service sectors. It sets the federal funds rate target, which is achieved through open market purchases by the Federal Reserve and has a broad impact on interest rates in the financial system and the economy. The committee consists of 12 members from regional reserve banks
Main Point
An Eye on Potential Rate Cuts in 2024
We believe that investors will be looking for clues from economic, inflation and central bank reports on the likelihood, timing and magnitude of rate cuts in 2024. The better-than-expected U.S. jobs report may give pause to investors looking for multiple Fed cuts this year, though we think some indicators of a slowing economy also support that view.
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