Market Perspectives May 2024
As pessimism sets in on the pace of rate cuts, find out our latest views on global themes, trends and events influencing investors.
03 May 2024
Julien Lafargue, CFA, London UK, Chief Market Strategist
Concerns over sticky prices have resurfaced in recent months, as US disinflation appears to have stalled. It may be true that the yearly change (Y/Y) in the US consumer price index (CPI) headed up to 3.5% in March, versus 3.1% in January. But on closer inspection, it’s clear that only a few key elements – oil prices being one – have been responsible for this rebound.
The inflationary concerns really come from services prices, excluding housing, which continue to run hot (up 4.8% Y/Y in March). Again, the reality is that these represent only a minority of the overall index. Similarly, the 22% Y/Y increase in car insurance prices in March should not be extrapolated.
In the end, for inflation to truly be sticky, salaries probably need to go up in tandem with prices. And they are not, at least according to the data provided by companies like recruiter Indeed. Based on their employment website, average wage growth has actually returned to pre-pandemic levels at around 3% (see chart). This suggests that although it may take time for the US CPI to hit target, the disinflationary process is still underway.
The year-on-year average growth in US advertised job postings has descended to pre-pandemic levels
Gold prices chalked up all-time highs on a regular basis in April. Some would point to heightened geopolitical tensions and investors desire to hedge against high inflation, elevated debt levels and much uncertainty. While these factors may have mattered, they don’t explain why the performance of gold miners from the East and the West has diverged.
Indeed, there has been an unprecedented divergence in the performance of US versus Chinese miners this year (see chart). If gold prices are going up, they should be doing so for everybody. Well, that’s the theory at least. In reality, Asian investors appear to be much more attracted to gold than their American counterparts.
We’ve discussed previously how the Chinese central bank has ramped up its gold purchases, but it’s not alone. Investors who have lost their preferred store of value, as the domestic real estate market remains under pressure, are also turning to the shiny metal and bumping up prices of anything gold-related, including miners. Maybe investors in the West should pay attention.
As the gold price surges, Chinese-based Shandong Gold Mining's share price has shot ahead of US peers in 2024
The US job market has been incredibly resilient to higher interest rates of late. However, once again, the devil is in the detail and the apparent strength may mask some weaknesses.
In the six months between October and March, the economy added almost 1.5 million new jobs, according to the US Bureau of Labor Statistics (BLS). However, more than a third of these additional jobs occurred in education and health services, both of which are closely linked to the state. The government itself has created some 300,000 jobs in the same period. Add these two sectors together and more than 60% of the jobs created since October were driven by the US administration.
Sceptics would point to the upcoming presidential election as a key factor. Whether this is a true or not, it’s worth noting that most local industries have only seen modest – if any – job growth in recent months, suggesting that the US job market may be weaker than it seems.
Almost two-thirds of new US jobs since October have been created in three sectors - government, education or health services
Although there is no clear one-for-one relation between US inflation and the S&P 500, history suggests that frothy equity valuations often rhyme with moderate inflation. That is except for the current cycle, where unusually high and even increasing share prices are occurring along with stubbornly elevated price increases (right hand top corner in the chart).
In addition, this unstable relationship highlights that valuations can either become very rich or very cheap when inflation is well behaved. However, when it lies around long-term extremes, valuations tend to compress, likely reflecting the added macroeconomic uncertainty.
For investors, this means that a return to the Fed’s inflation target would be a very welcome development. However, until then, and given the strange nature of this market cycle, it’s better to expect the unexpected.
The relationship between the US consumer prices index and the Shiller cyclically adjusted price-earnings ratio over various time periods
UK house prices have been fairly resilient in recent years. Since the Bank of England started to hike interest rates in December 2021, the Nationwide house price index is up by close to 2.5%. This strength may be surprising, given that the average UK mortgage rate (5-year fixed) went from 1.6% to 4.4% in the same period.
While limited transactional activity could distort house price indices, (December’s Land Registry sales were almost a third of what they were two years earlier), the strength of the domestic job market may be another contributing factor. Indeed, history suggests that there has been a close inverse relationship between house prices and unemployment rate.
If this relationship holds and a soft economic landing can be engineered by policymakers (ie perhaps reflected by only a very limited increase in the unemployment rate), then home prices should remain well supported.
The relationship between the UK unemployment rate and subsequent house prices shows how important the former is to setting the latter
As pessimism sets in on the pace of rate cuts, find out our latest views on global themes, trends and events influencing investors.
This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.
This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.
This communication:
(i) is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;
(ii) is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;
(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and
(iv) has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.