Global Economy & Markets, Weekly Roundup 04/03/24
Global equities edged higher ahead of ECB meeting
Over the past month, stock market breadth has improved somewhat, as 73% of S&P500 stocks are now trading above their 200-day moving average, a level witnessed in July 2023. In addition, more stocks have reinstated upward trends, with 27% of S&P500 stocks hitting 52-week highs, a level witnessed in January 2022.
In addition, the ratio of the equal weighted S&P500 index (SPW), where each company in the index is allocated a fixed weight of 0.2%, to the market capitalization weighted benchmark (SPX) has stabilized, following though a long downward channel.
Having said that, conventional valuation metrics for both indices are hovering significantly above their long-term averages with the SPW P/E ratio at 16.6x (15-year average of 15.5x) and the SPX P/E ratio at 20.8x (15-year average of 16.4x). Equity valuations are less elevated in Europe.
Global equity markets posted further gains in the past week, with the S&P500 up by +0.9% (+8% YtD). In Japan, the Nikkei225 continued to overperform (+19% YtD in local currency and +15% in euro terms), breaching the 40K threshold for the first time on Monday due to strong economic data.
Attention now turns to the ECB, which is expected to stand pat on March 7th (DFR: +4.0% | MRO: +4.5%). The latest inflation readings, particularly regarding core, have been roughly consistent with ECB staff’s projections back in December.
The core CPI index decelerated to +3.1% yoy in February from +3.3% yoy in January, meaningfully above consensus expectations for +2.9% yoy, with sequential inflation turning out higher in January and February. As result, core CPI stands at +3.2% yoy on average in January-February, compared with ECB’s projections in December 2023 for +3.1% yoy on average in Q1:2024.
Regarding the inflation forecasting horizon up to 2026, ECB staff’s technical assumptions in December 2023 called for (average) Brent oil prices of €77/barrel, natural gas prices of €43/Mwh, EUR/USD of $1.08 and an average 3-month Euribor of +3.0%. Based on futures and FRA average prices since mid-February, mean expected values for 2024-2026 are €69/barrel (-11% lower compared with December), €27/Mwh (-37%), $1.11 (+3%) and +2.9%.
All told, the aforesaid factors suggest that core CPI projections will continue to point to an alignment with the target by end-2025 and with the headline reaching 2% possibly somewhat sooner than suggested in December’s estimates (Q3:2025), leaving the door open to interest rate cuts, albeit it is too early for the ECB to pre-commit as to the timing.
ECB officials have consistently signaled that data on wages will be necessary to assess whether inflation is convincingly easing towards the target of 2%. Some depth, particularly regarding 2024 wage negotiations, will not be available until May, making an interest rate cut before the June meeting, absent an unexpected deep recession, less likely. Markets, according to overnight index swaps, have scaled back interest rate cut expectations significantly.
Investors will also look for fresh FOMC commentary, with the Federal Reserve Chair Powell, providing on March 7th the semiannual monetary policy report to the US Congress.
Over the past month, stock market breadth has improved somewhat, as 73% of S&P500 stocks are now trading above their 200-day moving average, a level witnessed in July 2023. In addition, more stocks have reinstated upward trends, with 27% of S&P500 stocks hitting 52-week highs, a level witnessed in January 2022.
In addition, the ratio of the equal weighted S&P500 index (SPW), where each company in the index is allocated a fixed weight of 0.2%, to the market capitalization weighted benchmark (SPX) has stabilized, following though a long downward channel.
Having said that, conventional valuation metrics for both indices are hovering significantly above their long-term averages with the SPW P/E ratio at 16.6x (15-year average of 15.5x) and the SPX P/E ratio at 20.8x (15-year average of 16.4x). Equity valuations are less elevated in Europe.
Global equity markets posted further gains in the past week, with the S&P500 up by +0.9% (+8% YtD). In Japan, the Nikkei225 continued to overperform (+19% YtD in local currency and +15% in euro terms), breaching the 40K threshold for the first time on Monday due to strong economic data.
Attention now turns to the ECB, which is expected to stand pat on March 7th (DFR: +4.0% | MRO: +4.5%). The latest inflation readings, particularly regarding core, have been roughly consistent with ECB staff’s projections back in December.
The core CPI index decelerated to +3.1% yoy in February from +3.3% yoy in January, meaningfully above consensus expectations for +2.9% yoy, with sequential inflation turning out higher in January and February. As result, core CPI stands at +3.2% yoy on average in January-February, compared with ECB’s projections in December 2023 for +3.1% yoy on average in Q1:2024.
Regarding the inflation forecasting horizon up to 2026, ECB staff’s technical assumptions in December 2023 called for (average) Brent oil prices of €77/barrel, natural gas prices of €43/Mwh, EUR/USD of $1.08 and an average 3-month Euribor of +3.0%. Based on futures and FRA average prices since mid-February, mean expected values for 2024-2026 are €69/barrel (-11% lower compared with December), €27/Mwh (-37%), $1.11 (+3%) and +2.9%.
All told, the aforesaid factors suggest that core CPI projections will continue to point to an alignment with the target by end-2025 and with the headline reaching 2% possibly somewhat sooner than suggested in December’s estimates (Q3:2025), leaving the door open to interest rate cuts, albeit it is too early for the ECB to pre-commit as to the timing.
ECB officials have consistently signaled that data on wages will be necessary to assess whether inflation is convincingly easing towards the target of 2%. Some depth, particularly regarding 2024 wage negotiations, will not be available until May, making an interest rate cut before the June meeting, absent an unexpected deep recession, less likely. Markets, according to overnight index swaps, have scaled back interest rate cut expectations significantly.
Investors will also look for fresh FOMC commentary, with the Federal Reserve Chair Powell, providing on March 7th the semiannual monetary policy report to the US Congress.