Global Economy & Markets, Weekly Roundup 26/02/24
The AI-led equity market rally continues
Global equity markets rose, with US, euro area and Japan bourses reaching record highs. The S&P500 was up by +1.7% wow (+7% YtD), with an upbeat Q4:2023 report from the prominent semiconductor manufacturer Nvidia providing fresh fuel to the Artificial Intelligence-led rally. NVDA increased by +8.5% wow (+233% year-over-year), following strong EPS growth of $5.16 versus consensus estimates for $4.64.
US Treasury yields were modestly changed, with the 2-year yield up by +3 bps wow to +4.69% (+44 YtD). The minutes of the latest Federal Open Market Committee meeting and recent officials’ commentary were against moving too quickly towards easing the monetary policy stance. As a result, investors continued to revise down the expected sum of rate cuts in 2024.
At the same time, “in-depth” discussions (and possibly decisions) appear set to take place on March 20th on slowing the pace of the balance sheet runoff (Quantitative Tightening - “QT”: holdings of US Treasury securities and Mortgage-Backed Securities are currently reduced by c. $60 bn & c. $35 bn per month, respectively).
A key takeaway from the accounts of the January 24th - 25th ECB meeting, was that officials viewed the risks associated with cutting policy rates too early, as outweighing the respective ones related to moving too late. According to EUR overnight index swaps, markets now price in -100 bps of ECB rate cuts by year-end versus -150 bps a month ago.
More recently, ECB Governing Council member Holzmann said doesn't see reductions in interest rates coming before the Fed, although ECB President Lagarde underpinned the ECB’s independence from other central banks. Asynchronous monetary conditions in the United States and the euro area, as the US economy is buoyant, could have FX repercussions (weaker EUR).
Attention now turns to inflation prints in the euro area (March 1st) and the US (February 29th). In the euro area, a significant deceleration is expected for February’s annual growth of both the headline CPI (+2.5% from +2.8% in January) and the core index (+2.9% from +3.3%). In the US, the annual growth of the PCE Price Index, the Fed’s preferred metric to gauge inflation pressures, is expected at +2.4% in January from +2.6% in December (headline) and +2.8% from +2.9% for the core.
In China, the gradual decline in house prices continued in January. Note that since 2021, when the prominent real estate developer Evergrande defaulted on its debt, significantly exacerbating prospective homebuyers’ confidence issues, a sharp drop in sales of residential buildings by c. -40% in terms of floor space has taken place (2023 versus 2021).
More importantly, Local Governments (LG) efforts have been the major pillar in containing price adjustments. Note that under the Long-Term Mechanism for Real Estate, introduced in 2018, LGs are officially mandated to maintain real estate price stability, utilizing a wide array of tools (including, inter alia, listing approvals) to discourage transactions outside a narrow range of preferred prices. Having said that, expectations of future home price declines could further reduce demand, delaying sector’s adjustment.
Nevertheless, the downward correction for prices has been relatively modest in that period. In January 2024, prices of new and 2nd-hand residential buildings stood at -2% & -8% versus November 2021 levels, respectively. That development is mostly due to Authorities’ intervention, with financial stability considerations (mostly related to preventing an outsized fall in loan collateral values), inter alia, being pivotal. In the event, policies to support demand have been put in place, including relaxing downpayment requirements, easing mortgage restrictions and lowering interest rates on existing and new mortgage loans. The People’s Bank of China in the past week made the largest cut in the 5-year Loan Prime Rate (a benchmark for mortgage loan interest rate setting) since it was introduced in 2019, by -25 bps to 3.95%.
Global equity markets rose, with US, euro area and Japan bourses reaching record highs. The S&P500 was up by +1.7% wow (+7% YtD), with an upbeat Q4:2023 report from the prominent semiconductor manufacturer Nvidia providing fresh fuel to the Artificial Intelligence-led rally. NVDA increased by +8.5% wow (+233% year-over-year), following strong EPS growth of $5.16 versus consensus estimates for $4.64.
US Treasury yields were modestly changed, with the 2-year yield up by +3 bps wow to +4.69% (+44 YtD). The minutes of the latest Federal Open Market Committee meeting and recent officials’ commentary were against moving too quickly towards easing the monetary policy stance. As a result, investors continued to revise down the expected sum of rate cuts in 2024.
At the same time, “in-depth” discussions (and possibly decisions) appear set to take place on March 20th on slowing the pace of the balance sheet runoff (Quantitative Tightening - “QT”: holdings of US Treasury securities and Mortgage-Backed Securities are currently reduced by c. $60 bn & c. $35 bn per month, respectively).
A key takeaway from the accounts of the January 24th - 25th ECB meeting, was that officials viewed the risks associated with cutting policy rates too early, as outweighing the respective ones related to moving too late. According to EUR overnight index swaps, markets now price in -100 bps of ECB rate cuts by year-end versus -150 bps a month ago.
More recently, ECB Governing Council member Holzmann said doesn't see reductions in interest rates coming before the Fed, although ECB President Lagarde underpinned the ECB’s independence from other central banks. Asynchronous monetary conditions in the United States and the euro area, as the US economy is buoyant, could have FX repercussions (weaker EUR).
Attention now turns to inflation prints in the euro area (March 1st) and the US (February 29th). In the euro area, a significant deceleration is expected for February’s annual growth of both the headline CPI (+2.5% from +2.8% in January) and the core index (+2.9% from +3.3%). In the US, the annual growth of the PCE Price Index, the Fed’s preferred metric to gauge inflation pressures, is expected at +2.4% in January from +2.6% in December (headline) and +2.8% from +2.9% for the core.
In China, the gradual decline in house prices continued in January. Note that since 2021, when the prominent real estate developer Evergrande defaulted on its debt, significantly exacerbating prospective homebuyers’ confidence issues, a sharp drop in sales of residential buildings by c. -40% in terms of floor space has taken place (2023 versus 2021).
More importantly, Local Governments (LG) efforts have been the major pillar in containing price adjustments. Note that under the Long-Term Mechanism for Real Estate, introduced in 2018, LGs are officially mandated to maintain real estate price stability, utilizing a wide array of tools (including, inter alia, listing approvals) to discourage transactions outside a narrow range of preferred prices. Having said that, expectations of future home price declines could further reduce demand, delaying sector’s adjustment.
Nevertheless, the downward correction for prices has been relatively modest in that period. In January 2024, prices of new and 2nd-hand residential buildings stood at -2% & -8% versus November 2021 levels, respectively. That development is mostly due to Authorities’ intervention, with financial stability considerations (mostly related to preventing an outsized fall in loan collateral values), inter alia, being pivotal. In the event, policies to support demand have been put in place, including relaxing downpayment requirements, easing mortgage restrictions and lowering interest rates on existing and new mortgage loans. The People’s Bank of China in the past week made the largest cut in the 5-year Loan Prime Rate (a benchmark for mortgage loan interest rate setting) since it was introduced in 2019, by -25 bps to 3.95%.