Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 01/04/24
Risk assets posted strong first quarter performance
Global equities increased sharply in Q1 (MSCI ACWI: +8% qoq) and speculative grade corporate bond spreads narrowed by -44 bps qoq (EUR) and -27 bps qoq (USD) respectively, despite higher core risk-free rates. The prospect of policy rate cuts as inflation returns to target (see graph below), resilient economic activity and excitement regarding the impact of artificial intelligence on corporate productivity and profitability, fueled investors’ bullish sentiment.
Equity majors reached record highs, with the S&P500 up by +10% qoq, having posted five consecutive months of gains. The closely linked to artificial developments S&P500 Semiconductor & Semiconductor Equipment index led the increase, up by +39% qoq.
Country-wise, Japanese equities overperformed in Q1:2024, with the Nikkei225 up by +21% qoq (in local currency, +16% in euro terms), supported by: (i) corporate reforms; (ii) the increased likelihood that Japan has escaped the deflation trap and; (iii) a weaker Yen by -4% in nominal effective exchange terms. Recall that a weaker Yen is a tailwind for export-oriented firms, as 60% of the revenues of the companies comprising the index stem from abroad.
Main risk factors for the equity rally, include: i) a potential re-acceleration of inflation which could derail the prospect of monetary policy easing; ii) commercial real estate woes, especially regarding the office segment, which pose risks, inter alia, for banks with a heavy respective loan exposure; iii) Chinese growth falling short of expectations and; iv) geoeconomic risks (Ukraine, Middle East and US Elections in November, where trade policy uncertainty could return in the spotlight).
Expectations remained in place during Q1:2024 that monetary policy will turn less restrictive, albeit the anticipated timing was pushed back during the quarter. As a result, core government bond yields increased by c. +30 bps to +40 bps in the first quarter of 2024, remaining though below their multi-year peak October 2023 levels.
On US economic activity, the view for decent growth remains in place. Following strong performance in Q4:2023, private consumption (70% of US GDP) growth is set to have remained in positive territory in Q1:2024, up by +1.8% saar in constant price terms in January and February (average) versus Q4:2023 levels. The focus now turns to the US labor market report for March, due on April 5th. Consensus expects solid job creation to have continued, with non-farm payroll gains of +200k.
The US PCE Price Index, the Fed’s preferred measure to gauge inflation, came out in line with consensus estimates in February, with the headline index roughly stable at 2.45% yoy (+0.3% mom) and the core index decelerating by -0.1 pp to 2.8% yoy (+0.3% mom), the lowest annual rate since March 2021. Potential repercussions (e.g. via higher freight costs) from the collapse of the Baltimore Bridge, which has led, inter alia, to a halt in the operations in the respective port, a prominent commercial hub, will be monitored.
Attention in the current week also turns to March’s CPI in the euro area. We expect a moderate further deceleration by -0.1 pp for the annual growth of both the headline and the core index, to +2.5% & +3.0%, respectively. Bearing a significant upside surprise for CPI, the ECB will likely remain on track for commencing interest rate cuts in June.
Global equities increased sharply in Q1 (MSCI ACWI: +8% qoq) and speculative grade corporate bond spreads narrowed by -44 bps qoq (EUR) and -27 bps qoq (USD) respectively, despite higher core risk-free rates. The prospect of policy rate cuts as inflation returns to target (see graph below), resilient economic activity and excitement regarding the impact of artificial intelligence on corporate productivity and profitability, fueled investors’ bullish sentiment.
Equity majors reached record highs, with the S&P500 up by +10% qoq, having posted five consecutive months of gains. The closely linked to artificial developments S&P500 Semiconductor & Semiconductor Equipment index led the increase, up by +39% qoq.
Country-wise, Japanese equities overperformed in Q1:2024, with the Nikkei225 up by +21% qoq (in local currency, +16% in euro terms), supported by: (i) corporate reforms; (ii) the increased likelihood that Japan has escaped the deflation trap and; (iii) a weaker Yen by -4% in nominal effective exchange terms. Recall that a weaker Yen is a tailwind for export-oriented firms, as 60% of the revenues of the companies comprising the index stem from abroad.
Main risk factors for the equity rally, include: i) a potential re-acceleration of inflation which could derail the prospect of monetary policy easing; ii) commercial real estate woes, especially regarding the office segment, which pose risks, inter alia, for banks with a heavy respective loan exposure; iii) Chinese growth falling short of expectations and; iv) geoeconomic risks (Ukraine, Middle East and US Elections in November, where trade policy uncertainty could return in the spotlight).
Expectations remained in place during Q1:2024 that monetary policy will turn less restrictive, albeit the anticipated timing was pushed back during the quarter. As a result, core government bond yields increased by c. +30 bps to +40 bps in the first quarter of 2024, remaining though below their multi-year peak October 2023 levels.
On US economic activity, the view for decent growth remains in place. Following strong performance in Q4:2023, private consumption (70% of US GDP) growth is set to have remained in positive territory in Q1:2024, up by +1.8% saar in constant price terms in January and February (average) versus Q4:2023 levels. The focus now turns to the US labor market report for March, due on April 5th. Consensus expects solid job creation to have continued, with non-farm payroll gains of +200k.
The US PCE Price Index, the Fed’s preferred measure to gauge inflation, came out in line with consensus estimates in February, with the headline index roughly stable at 2.45% yoy (+0.3% mom) and the core index decelerating by -0.1 pp to 2.8% yoy (+0.3% mom), the lowest annual rate since March 2021. Potential repercussions (e.g. via higher freight costs) from the collapse of the Baltimore Bridge, which has led, inter alia, to a halt in the operations in the respective port, a prominent commercial hub, will be monitored.
Attention in the current week also turns to March’s CPI in the euro area. We expect a moderate further deceleration by -0.1 pp for the annual growth of both the headline and the core index, to +2.5% & +3.0%, respectively. Bearing a significant upside surprise for CPI, the ECB will likely remain on track for commencing interest rate cuts in June.