Markets Weekly podcast – 18 November 2024
18 Nov 2024
Equity market slump and US jobs
05 August 2024
Amid weaker-than-expected data from the US economy, Julien Lafargue considers the market reaction to these announcements and the possible implications for investors. Key topics include rising unemployment, the latest rate decision from the US Federal Reserve and headlines from the second-quarter earnings season.
Our host also examines the Bank of England’s first rate cut since March 2020 – could more cuts follow soon?
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Julien Lafargue: Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank, and I will be your host today.
We’re going to have a bit of a special edition. We were thinking about bringing our real estate expert to discuss everything real estate, but given the recent events in markets, we decided to push back this appearance, probably to next week. And, instead, we’re going to spend the next few minutes talking about what’s happening in markets, because this Monday morning feels a bit painful I’m sure for some investors.
So, if we look at what happened last week. Well, equity markets slumped as recession fears rose on weaker-than-expected US data. To give you some numbers, the S&P 500, and that’s before they open today, is down almost 6% from its July peak, and the Nasdaq-100, more geared towards tech companies, is down more than 10% and, therefore, officially in correction territory.
As I speak, the Nasdaq is indicated to be down maybe as much as 6% in addition to that 10% already, later today, so we’ll see. That sounds pretty bad, but let’s also remind ourselves that the S&P is still up 18% over the last 12 months and the Nasdaq still up 20%. So, we came down quite a bit, but we went up before that a lot more.
So, what triggered that weakness? As mentioned, the main trigger was a batch of weaker-than-expected datapoints from the US. There were three, in particular.
The US weekly unemployment claims came in higher than expected, to 149,000. The market was expecting 236,000. And that was the highest reading in almost a year.
We also had a poor manufacturing ISM. The consensus was expecting a reading of 48.8, which would have been a slight improvement versus the June reading at 48.5, but, in reality, we got 46.8, so a significant deterioration there too.
And, finally, the nail in the coffin came in the form of the July jobs report, with nonfarm payroll in the US coming in at 114,000. The consensus was expecting 175,000. At the same time, the unemployment rate shot up to 4.3%. So, all those numbers mixed expectations and, if you take them together, there is a really strong sense that the US labour market is starting to crack.
And it probably would not have been so bad if the Federal Reserve hadn’t chosen to keep interest rates unchanged earlier in the week. But because the Fed decided to buy itself some time, and wait for September before cutting interest rates, that prompted investors to question whether the central bank was falling behind the curve and risking a policy mistake.
So, should we be worried? The reality is we don’t think so. We’re sticking to the view that we first laid out in our ‘Outlook 2024’, that was back in November last year, when we said that we were expecting 2024 to be a year of lower growth, lower inflation and lower rates, and we believe this view is basically playing out.
What has caused the increased volatility in recent days is the fact that the market has started to believe in this forever, no-ending ‘goldilocks’ scenario. This is obviously not going to be the case and some readjustment, in terms of positioning, is needed and that’s what taking place at the moment.
And while we do expect growth to slow, we don’t anticipate a collapse of the US economy, and markets should soon realise that.
Finally, we’ve been maybe boring talking about how important it is to be properly diversified, but the reason we’ve been talking about it again and again is exactly for scenarios like the one that is playing out today.
The good news is that diversification is playing its role as we speak. This is not 2022, when both stocks and bonds went down and there was really nowhere to hide. In this case, bonds are actually performing quite well and serve as a very strong safe-haven and ballast in portfolios.
So, hopefully, a diversified portfolio will not have near the down performance that I’ve mentioned earlier, when I was referring to the S&P or the Nasdaq. So, again, the message around diversification is so important.
Now, what’s next? Well, later today we’re going to get the services ISM. We had the manufacturing one last week, which was weak. The services one is very important. The consensus expects it to be down to 51.3 after a dip to 48.8 in June. And any lack of improvement on the services ISM front would further reinforce investors’ worry.
And also, we are out of the blackout period for the Fed members and their communication will be scrutinised. This morning, traders are pricing in a 60% chance, six zero, that the Fed may cut interest rates as soon as this week in response to the market rout.
So, clearly, we need to hear from Fed officials as to whether they’re taking into account the weakness we’re seeing in equity markets, whether they might want to have an emergency meeting or not, and what is their overall take on what’s happening.
And this, if they acknowledge the surprisingly weak numbers in terms of nonfarm payroll, although I do believe they had that number when they made that decision, if they do acknowledge that, and they do acknowledge increased concern around the shape of the US economy and the labour market, in particular, that might provide some relief.
Now, this is for the price action last week and early today. I also wanted to touch on the UK, closer to home, because again the UK seems to be relatively quiet amid all that noise. The Bank of England last week decided to cut interest rates by 25 basis points. It was a close call, a 5-4 vote, and the central bank maintained its data dependency when guiding for future monetary policy changes.
As we’ve seen with the Fed, this is definitely subject to change, but it looks like the UK economy is operating, for the time being at least, in its own bubble and the trajectory for monetary policy seems to be a bit clearer than it is in the US, where the market is now actually pricing in more than 100 basis points, or more than one percentage point, worth of cuts by the end of this year.
If you remember, less than five months ago, markets were starting to talk about a potential hike this year, and now we’re talking about more than a percentage point of cuts.
This is on the Fed side, while on the BoE side it seems relatively in line with our expectations and what the fundamental picture would justify, this pricing on the US side was that 110-120 basis points of cuts are being priced in between now and the end of the year. That feels a bit extreme to us.
Does that mean it will happen? No. But we don’t think the job market is totally collapsing. The GDP figure in the second quarter was still good, and if we focus back on the micro picture, at least we can find some solace in the fact that Q2 earnings have been decent.
Of the 75% of the S&P 500 companies that have reported earnings so far, around 78% have beaten expectations. The only negative was the fact that the surprise factor, the margin by how much companies have beaten expectations, on the earning side was a bit lower than it’s been historically. So, we’re currently around 4%, 4.5%.
Companies normally tend to beat earning expectations by a higher margin, but if you look at blended earnings growth for those 75% of companies that have reported already and the next 25% that will report this week and next week, earnings growth is tracking at around 11.5% year over year, which if that is confirmed, and it’s likely to be confirmed now that we are way past the half mark, this would be the highest growth reported since the fourth quarter of 2021.
So, at least from a company standpoint, an earnings standpoint, we’re not seeing any kind of slowdown, and although guidance may have been, you know, there were some positives and some negatives, we don’t expect earnings revisions to be drastically lower on aggregate following this earnings season.
So, at the micro level at least, the picture seems to be a bit more encouraging.
And, of course, we will follow up with any information as it comes through, and we will reflect on any new market developments. I want to reiterate the fact that it’s likely to be quite volatile for the next few days and maybe weeks, but this is when diversification does its job.
In terms of what to watch for this week, it will be a much quieter week, at least on the macro front. So, as I said, the most important release is probably going to be later today, on Monday, the US services ISM. Besides that, we’re going to get the Fed’s senior loan survey, also today on Monday, the RBA decision on Tuesday, and then some Chinese data, imports and exports on Wednesday and on Friday the inflation data.
So, again, just to reiterate the main message, given the volatility we are seeing in markets. This is, in our view, quite an overdone reaction. People are forced to sell what they own and reduce risk across the board. It means that people are not selling necessarily what they want to sell, and they might be selling companies that don’t deserve to be sold.
And when we get on the other side of that, which may be later this week, which may be, you know, in a few weeks’ time, we will see bargains emerging, and I think that’s when investors need to get ready to act.
Of course, we will be back and, as always, I know it might be more difficult this week, but we wish you the very best in the trading week ahead.
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