Market Moderates Rate-Cut Outlook

For the week ending 19 January 2024

As of midday on Friday, global equities are slightly lower on the week. The yield on the benchmark US 10-year note rose 16 basis points to 4.17% as the market unwound aggressive rate cut bets. The price of a barrel of West Texas Intermediate crude oil was steady at $74.35. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 13.8 from 12.5. 

MACRO NEWS

Rate cut expectations dampened

After a run of strong economic data and protestations from multiple central bankers, including an influential US Federal Reserve governor and the president of the European Central Bank, markets dialed back aggressive rate cut expectations this week. Fed Governor Christopher Waller said on Tuesday that he sees no reason for the Fed to move as quickly  or cut as rapidly as it has in the past and that when cuts begin, they should be made methodically. European Central Bank President Christine Lagarde said the ECB is likely to wait until the summer before contemplating rate cuts. Along with a strong US employment report, solid December US retail sales data (core sales rose 0.8% on the month) and the lowest initial jobless claims data since September 2022 (187,000) suggest that economic growth is too resilient to allow the Fed to begin easing policy in March, given the risk of higher inflation.

Demographics add to China’s growth woes

China reported this week that its population declined 2.08 million in 2023 to 1.41 billion. The country reported fewer than half the births it did in 2016, when it lifted its one-child policy. Births dropped over 500,000 to just over 9 million. The latest data show that the fertility rate is less than half the replacement rate of 2.1 children per woman over her lifetime. A shrinking population has historically been a drag on economic demand. In 2023, economic growth met the government’s 5.2% target, but data published this week show that new home prices fell 23% year over year in December as the property crisis dragged on. This week, the People’s Bank of China defied expectations by failing to cut the rate on its medium-term lending facility. 

QUICK HITS

The US Congress passed another short-term government funding bill on Thursday, avoiding a partial government shutdown until at least early March, when the bill expires. President Joe Biden is expected to sign the bill Friday.

The leaders of the tax-writing committees of the US Congress unveiled a bipartisan $78 billion bill that will extend multiple tax breaks. The bill, which increases the child tax credit and accelerates the expensing of research and development for businesses, faces an uphill battle in both houses of the closely-divided legislature.

Lower interest rates helped improve sentiment, though it remains negative, according to the National Association of Homebuilders survey. Its sentiment index rose to 44 in January from 37 in December.

December US existing home sales fell 1%.

Germany’s economy, the largest in Europe, shrank 0.3% in 2023.

The Fed ran an operating loss of $114.3 billion in 2023, its largest ever. Rising interest rates saw the central bank pay $281.1 billion in interest to financial institutions while earning $163.8 billion in interest on bonds that it owns.

The White House redesignated Yemen’s Houthi militia as a global terrorist organization, a label the Biden administration dropped upon assuming office in 2021. US forces continued to strike Houthi facilities in Yemen this week after repeated Houthi attacks on Red Sea shipping.

Consumer prices in the United Kingdom expanded at the pace expected in December, rising 0.4% month over month. From a year ago, prices gained 4%, and were up from 3.8% in November.

Global corporate defaults surged in December, according to a report by credit rating agency Moody’s. The global 12-month trailing corporate default rate rose to 4.8% in December, the highest rate since May 2021, when the global economy was still reeling from the effects of the pandemic.

For US retailers, the holidays were happy ones as sales rose 3.8% from the year before, according to the National Retail Federation.

The Nasdaq 100 closed Thursday at an all-time high of 16,057.

Bloomberg reported this week that under a proposed plan by US banking regulators, banks would be required to access funds from the Fed’s discount window at least once a year. Such a move would reduce the stigma of borrowing from the window and ensure that lenders are ready for any financial turbulence. The move comes in the wake of last spring’s regional banking crisis, which found some banks operationally unprepared to borrow from the discount window.

Retail sales in the UK tumbled 3.2% in December, the worst reading since January 2021, increasing the odds that the country slipped into a mild recession at the end of 2023.

Inflation expectations for the year ahead fell to 2.9%, the lowest level since 2020, a University of Michigan survey showed. 

EARNINGS NEWS

With just 10% of the constituents of the S&P 500 Index having reported for Q4 2023, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings fell 1.9% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 2.9% year over year.