Markets Weekly podcast – 15 January 2024
US inflation and Q4 corporate earnings
Tune in as host Julien Lafargue shares fresh insights on key events shaping financial markets over the past seven days. As well as the latest US inflation figures, he considers the most recent earnings data from major US banks and other key investor topics.
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Julien Lafargue: Welcome to a new edition of Barclays’ weekly podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank, and I will be your host today.
Again, a bit of a different session today. I’ll be the only speaker running through last week’s events and talking a bit about our views and what to look for this week. We’ll be back with a guest speaker next week.
In terms of last week, well, equity market performance was mixed. The US clearly outperformed. One reason behind that was the significant drop in yields, especially at the short end. In fact, the two-year yield in the US fell by nearly 25 basis points for the week to just above 4.15%. This is the lowest level we’ve seen since May 2023.
What’s the reason behind that move? Well, talks around the tapering of quantitative tightening, QT in short, have gained a lot of traction recently, i.e. Fed officials, as well as the market, are starting to bounce around the idea that it would be time for the central bank to stop, or at least slow down, the pace at which it shrinks its balance sheet.
What would that mean? Well, obviously, it would mean more liquidity or at least less withdrawal of liquidity, which is something that the market would welcome.
So, why does it matter? Well, it matters because as we’ve discussed repeatedly in the past, if you have a deposit, a short maturity cash instrument, well, you’re facing an increasingly high reinvestment risk, i.e. interest rates, especially in the short term are coming down and the rates you may have been able to lock in a few months ago when you set up that deposit won’t be on offer again. That’s why it’s so important, in our view, to stop thinking about how to redeploy this cash to avoid this reinvestment risk and, therefore, avoiding being stuck in a lower yielding deposit or short-term maturity instrument.
Now, the other key element of last week was, obviously, the US inflation reading for the month of December, So, at the headline level, inflation climbed 3.4% year over year, which was a 30 BP (basis-point) acceleration versus November. The consensus was looking for 3.2% so the reading was actually slightly higher than expected.
Meanwhile, at the core level, so excluding food and energy prices, core CPI dipped 10 basis points versus the prior month to 3.9%. Again, the consensus was expecting a slightly lower reading at 3.8%. So, overall, slightly hotter than expected inflation in the US.
One key element, though, is the fact that shelter costs remain a key source of sticky inflation. Prices rose by 0.5% month on month owing to an equivalent increase in owners’ equivalent rent and a 0.4% increase in rents. This is very important because housing-related costs represent a significant portion of the CPI basket and, as long as shelter costs fail to slow down, it’s very difficult to imagine that overall inflation will come down. Now, the good news is that the Fed itself is expecting shelter costs to gradually come down and potentially even turn negative by the middle of this year.
Now, moving on, the other key datapoint from last week was, well, the start of the fourth quarter 2023 earnings season in the US. And, as usual, we started with the main US banks. It’s way too early to make any broad observation when it comes to the overall earnings season, but banks gave us a few clues as to what’s going on in the US economy.
Results, unfortunately were, as is often the case in the last quarter of the year, clouded by several one-offs but, interestingly, comments made by management teams were very consistent with what they said just a month ago at a conference. So, no major surprise there.
Overall, the tone remains relatively upbeat. However, there are big questions marks in management teams’ minds around what the consumer is going to do in 2024. We know that US consumers have depleted their excess savings and there is a big question as to whether they’re going to be able to spend as much as they have in 2023.
And maybe we got another indication about the fact that this spending, especially on the discretionary side, might be on the way down. Indeed, we got two important updates from two companies this time in Europe, Burberry and Electrolux, which both issued downside pre-announcements, i.e. revising lower their outlook for the coming quarters. And this is a red flag when it comes to discretionary spending, so something that will be worth monitoring during the rest of the earnings season.
Finally, over the weekend we got the result from the election in Taiwan that was closely watched by investors, but no surprise there. The DPP won the presidency for the third time. The one element that was a bit surprising is that they lost the legislature. Implications when it comes to the relationship with China are, to be fair, relatively unclear, but this shouldn’t be a gamechanger so, hopefully, the market will move on and start focusing on something else, other than Taiwan.
So, what does that all mean in terms of our views? Well, with the market now seeing around 80% chance of a Fed cut in March which, by the way, is the new revised forecast by Barclays Investment Bank, they now expect the Fed to cut in March as well. Well, 80% chance of a cut in March to us seems quite aggressive and, clearly, it’s at odds with earnings expectations if you’re looking on the equity side. The bottom-up consensus is currently looking at 11% year-over-year earnings growth for the S&P 500 companies in 2024.
So, in other words, it looks like the fixed income market is calling for a recession, or at least a meaningful slowdown. But, on the other hand, stocks seem to be looking at a no-landing scenario, i.e. very strong growth ahead, at least from an earnings perspective. So, with the earnings season getting under way, we met get a clearer idea as to who is right in the next few weeks. In the meantime, though, investors should be prepared for some volatility.
So, to conclude, what should be on your agenda for this week? Well, outside of earnings, the focus will be on Chinese data with Q4 GDP numbers, as well as industrial production and retail sales figures for the month of December. That will come on Wednesday. And so will the UK inflation data for the month of December, as well as the retail sales figures also on Wednesday, so a pretty busy day that day.
The other main catalyst of the week could be the minutes from the ECB’s last meeting, and those will come out on Thursday. So, another busy week, but I think that the focus really should gradually shift from the macroeconomic environment to the microeconomic environment, with companies starting opt report earnings before, towards the end of the month, going back to central banks as we get through several meetings, including the Fed meeting.
We’ll be back next week, hopefully with a guest speaker, to discuss a very important asset class to us and one that has been in the spotlight recently, private equity. But, in the meantime, as always, we wish you all the very best in the trading week ahead.
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