Financial markets are increasingly discounting the likelihood of a first interest rate cut in the United States around the turn of the summer
July 16, 2024
The topic of the week:
We are already approaching the summer vacations (if some have not already started them), and from Portocolom we take this note to review the current situation both economic and financial markets.
The levels of economic activity in the United States continue to be good, but the exuberance of previous months is no longer perceived. At the end of June, GDP for the first quarter of 2024 was published with growth of 1.4%, which compares to the last year-on-year figure of 3.4% at the end of December. The other major reference, the PMIs, maintained the solid evolution of the last few months in which consecutive growth has been seen, and which also exceeded market estimates. The manufacturing PMI rose from 50 points in April to 51.6 in June, while the services PMI continues to show great strength, exceeding 55 points.
In terms of employment data, the percentage unemployment rate is still at historically low levels, but a certain change in the trend we have been observing for some months now is beginning to consolidate. Thus, the unemployment rate rose to 4.1% in June, which in addition to being the highest level recorded since November 2021, represents a rise of 0.7% from the lows set in April 2023 at 3.4%. Normally, this percentage rise in unemployment has always coincided with phases of economic recession, although in this case we are only experiencing a slowdown phase. Non-farm payrolls figures were also released, down from 272,000 in May to 206,000 in June (a figure that was above market expectations), which represented an increase in job creation of 1.7% y/y, the lowest level recorded since March 2021. In addition, both April and May data have subsequently been revised downward (from 165,000 to 108,000 and from 272,000 to 218,000 respectively).
Inflation continues to be the main indicator on which the monetary authorities focus when making interest rate decisions. In this regard, a few weeks ago we learned about personal consumption expenditures, the most relevant measure for the Fed to track inflation, which rose to 2.6% in May (the lowest level since March 2021), and which continues to maintain a downward path practically uninterrupted since then. Likewise, last Thursday we learned the CPI data for the United States, in which the general index fell one tenth more than expected (3.0% vs. 3.1% expected), a very good figure, especially compared to the 3.3% recorded in May. At the underlying level, it dropped one tenth from the previous month, to 3.3% (as expected). In Europe, CPI data will be released tomorrow, Wednesday, and forecasts indicate that headline inflation in June will fall by one tenth of a point to 2.5%, while core inflation will remain unchanged at 2.9%.
On both sides of the Atlantic, the trend is clear, with price growth levels increasingly close to the 2% target. Although Fed Chairman Powell was clear in his latest statements that the fight against inflation is not over, he also admitted that the Fed does not have to wait for inflation to fall to 2% before starting to cut rates. Fixed income markets reacted both to these statements and to the subsequent inflation data (which, as mentioned above, surprised to the downside), with a significant fall in bond yields, anticipating an increasingly expected 0.25% interest rate cut in the US around the turn of the summer. In Europe, the ECB had anticipated at its June meeting with a 25 bps rate cut, and for the July meeting scheduled for this week, the market is discounting that there will be no change. It is most likely to wait for the Fed to make its first rate cut in order to continue reducing monetary policy pressure in the euro zone, as long as macro data allow it (they continue to be «data dependent»).
With regard to equity markets, in the last month we have seen a mixed performance among the main regions. The United States has led the rises thanks to the excellent performance of mega-cap companies, and continues to set record highs, while the Japanese market (also at record highs) has also remained very strong, being the market that has recorded the greatest stock market gains so far this year. It should be noted that in the last few sessions, in view of the expectation of future interest rate cuts in the US, there has been a certain rotation of managers towards smaller capitalization stocks, which so far are lagging behind the large technology stocks in terms of revaluation.
In contrast, Europe and China saw June close with declines in their stock markets, where political uncertainty in the former (especially in France) and economic weakness in the latter, have clearly weighed down their main indexes.
The beacon of the markets:
For yet another week, the performance of the equity markets has been positive in the main markets with a few minor exceptions. The S&P 500 closed at 5,615.35 points, a rise of 0.86%, after having set a new all-time high of 5,655.56 points. The last two hours of Friday’s session were sellers, reducing the S&P’s weekly gains and pushing the Nasdaq 100 into negative territory, which lost 0.30% for the week. In Europe, the gains were greater after two clearly negative weeks against their US counterparts, with the Euro Stoxx 50 gaining +1.27% and the Ibex 35 +2.06%.
In the fixed income markets the trend was the same, widespread price increases that helped to reduce the cost of debt across the board. The key to the movement was better-than-expected inflation data in the United States. The 10-year Treasury closed at its first key level, +4.19%, down 9 bps from the previous week. The Bund was the one that reduced its yield the least, remaining at +2.5% (-3 bps) and the Bond recovered part of what was lost weeks ago, -11 bps and a yield of 3.34%. Let us recall that this week there is an ECB meeting in which no changes in monetary policy are expected.
As for the main commodities, precious metals rose again, gold closed at 2,421 $/oz, 1% higher, while Brent corrected -1.75% to $85/b. Monthly reports from both OPEC+ and the International Energy Agency (IEA) were little changed. OPEC cut production by 125,000 b/d by Saudi Arabia and Russia, but they still see a demand increase of 2.25M b/d in 2024 and 1.85M/b/d in 2025 when 106M/b/d will be consumed. For the IEA, there will be an increase in crude oil supply in 2024 of 970,000 b/d and 980,000 in 2025, when global supply will be 105 M/b/d. With the low economic activity in China and the slowdown in the US, what is keeping the price of oil high is the growing tension between Israel and Hezbollah and the continuous attacks by the Houthis in the Red Sea on the one hand, and the increase in demand in summer due to the increase in air and road traffic on the other.
This week, the macroeconomic references to follow are the following: i) China: the GDP known yesterday remained at 4.7% compared to the estimate of 5.1%, new symptoms of the economic weakness from which the world’s second largest economy is unable to emerge. This week is the third annual meeting of the country’s senior officials, and we will be awaiting any announcements they may make, ii) Europe: ECB meeting, industrial production and CPI for which a +2.5% figure is estimated without changes, as well as the underlying figure which will be +2.9% and, iii) USA: week of low macroeconomic impact. USA: week of low macro impact where we highlight retail sales and industrial production data, although what will really attract investors’ attention will be corporate results, including those of large banks such as Goldman Sachs, Morgan Stanley and Bank of America.
Quote:
And we sign off with the following quote from actor and singer Will Smith: «If you’re not making someone else’s life better, you’re wasting your time. Your life can only get better if you make someone else’s life better.»
Summary of the performance of major financial assets (7/15/2024)
This report does not provide personalized financial advice. It has been prepared irrespective of the particular circumstances and financial objectives of the persons receiving it.
This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information at the date of issue of the report and is subject to change without notice. Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the contents of this document. Neither this document nor its contents constitute an offer, invitation or solicitation to purchase or subscribe for securities or other instruments or to make or cancel investments, nor may they form the basis of any contract, commitment or decision of any kind.
The information contained herein has been obtained from public sources believed to be reliable, and while reasonable care has been taken to ensure that the information contained herein is neither uncertain nor unequivocal at the time of publication, we do not represent that it is accurate and complete and it should not be relied upon as if it were. Portocolom Agencia de Valores S.A. assumes no responsibility for any loss, direct or indirect, that may result from the use of the information provided in this report. Past performance of variables may not be a good indicator of future performance.