Wednesday 17th April 2024 |
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Global
The S&P500 tried to rebound at various points in the session, but closed slightly lower as Fed Reserve Chair Jerome Powell said in a speech that more progress was needed with inflation before interest rates could be lowered. He noted that inflation has been little changed this year, while the economy has remained resilient – a point noted by the IMF which expects the US economy to grow at double the rate of G7 peers this year. Bond yields rose with that on the 2-year US Treasury going above 5%. Europe meanwhile seems much closer to a rate cut although ECB President Christine LaGarde said she was watching energy prices closely. Oil held steady overnight with US officials saying that expect a “limited” response from Israel to Iran’s missile attacks.
The S&P500 closed 0.2% lower, while the Nasdaq declined 0.1%, despite AI-related names performing strongly. The Dow rose 0.2%, supported by a 5% surge in United Health with the multinational health insurance company beating on earnings estimates. Investor sentiment overall was dampened by the comments from Powell, which is providing a further cause to push out the timeline for rate cuts.
Central bank policymakers had pencilled in 3 interest rate cuts in the dot-plot forecasts last month, but markets are now pricing in one to two reductions, and much later in the year. The Fed Chair said overnight “We’ve said...we’ll need greater confidence that inflation is moving sustainably towards 2% before [it will be] appropriate to ease policy… recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.”
A resilient economy continues to afford the Fed the luxury of time in terms of pushing the button on rate cuts. But there are some signs of weakness, and this may increase with the passage of time as rates remain elevated, potentially forcing the hand of officials more.
US industrial production rose 0.4% in March, in line with market expectations, though it fell 1.8% for the first quarter of 2024. Capacity utilization (a measure of total output potential) was 78.4%, below its long-run average of 79.6%. Separate data showed that new construction and permits to build homes missed expectations in March. Privately owned housing starts totalled 1.32, down some 14.7% from February and 4.3% lower than a year ago.
The International Monetary Fund though remains upbeat around the US and other advanced economies. The organisation said that the US was already “exceeding its pre-Covid-19 pandemic trend” while the eurozone was showing strong signs of recovery (although prospects were less bright for China). The IMF raised its global growth forecasts for 2024 to a consistent 3.2% (the same as 2023 with a similar forecast for 2025), up slightly from forecasts made in January, but adding that the global economy had proved “surprisingly resilient”, with the implication a “soft landing” beckons.
The IMF said it sees global headline inflation falling from an annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025. Downside risks to economic growth included China, geopolitical and trade tensions, while looser fiscal policy, falling inflation and advancements in artificial intelligence were cited as potential growth drivers.
A reasonable start to the earnings season (outlook statements aside) is also an indicator of the health of corporate America. Of the company’s reporting to date (albeit less than 10% of the S&P500), 80% have exceeded consensus earnings estimates. In this bucket overnight included United Health, drugmaker Johnson and Johnson (although the shares slipped), and United Airlines.
Morgan Stanley also beat first-quarter earnings expectations, underpinned by strong results in wealth management, trading and advisory. Quarterly revenues of US$15.1 billion were US$500m more than expected. The shares advanced, but those in Bank of America fell despite a strong quarter. Provisions for bad loans at the country’s second-biggest lender jumped 40% to US$1.3bn.
AI was capturing headlines again. Advanced Micro Devices rallied 2% after
unveiling new AI processors which is said were “the most powerful chips yet” for business PCs. Microsoft meanwhile is continuing to invest in the AI race. The tech titan is investing US$1.5 billion into G42, an artificial intelligence firm based in the United Arab Emirates. Data centre operator G42 will run its AI applications and services on the Microsoft Azure cloud service, as well as deploy Microsoft’s cloud offerings. The US and UAE governments appeared to be heavily involved in the deal.
Across the Atlantic European stocks were weaker, with the STOXX50 falling 1.4%, primarily in reaction to Powell’s comments. Those from ECB President Christine Lagarde provided more cause for optimism around the proximity of rate cuts. LaGarde said, “we are heading towards a moment where we have to moderate the restrictive monetary policy.” Markets are pricing in an ECB rate cut in June.
Stock wise, Adidas shares were on the up. The company raised its annual profit targets amid strong demand for classic sneakers such as “the Samba” and as it continues to unload its diminishing stockpile of Yeezy footwear after the split with rapper Ye/Kanye. The German sportswear company now expects to generate operating profit of around €700 million, well ahead of a previous target of €500 million. Not so good news for another shoe company Dr Martens – the shares fell nearly 30% to a record low as it announced the departure of its CEO and flagged a challenging outlook, with wholesale revenues in the US expected to down by double-digits year-on-year. The FTSE100 fell 1.8%.
In Asia, the Nikkei fell 1.9%, the Hang Seng declined 2.1% and the CSI300 fell 1.1%. The Chinese economy growing 5.3% in the first quarter compared to a year ago, up from 5.2% in the fourth quarter and faster than the 4.6% growth expected. On a quarter-on-quarter basis, China’s GDP grew 1.6%. Manufacturing was strong, holiday spending helped as did easier policy settings. The annual growth rate is ahead of Beijing’s 2024 target of 5%. However, industrial output growth of 4.5% missed estimates for a 6% expansion and was down from 7% in the previous month. Retail sales growth of 3.1% year on year, were similarly below estimates, of around 4.6% growth, and slowed from the prior month’s reading of 5.5% growth. The industrial output and retail sales prints raise questions about whether economic activity is tailing off.
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