Markets Weekly podcast – 18 November 2024
18 Nov 2024
US and UK retail sales | Q4 earnings
22 January 2024
Listen as host Julien Lafargue reflects on key data releases grabbing the financial headlines at the start of 2024. Topics include US and UK retail sales, inflation in the major regions and US central bank options. As the fourth-quarter earnings season continues, he also considers the fortunes of some of the world’s largest tech companies.
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Julien Lafargue: Welcome to a new edition of Barclays’ weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.
We will go through the events of last week, trying to reflect a bit of what it means for investors, as well as looking at what’s on the menu for the week ahead.
Looking at last week, it was another week of mixed performance. On one side, European equities lagged but, on the other, US equity markets continued to lead with the S&P 500 reaching a new all-time high. As a reminder, last time the S&P 500 broke its record close was in January 2022. In other words, the index has done practically nothing in the last 24 months or so, and this is maybe a good reminder for those who may be scared by last year’s rally and wondering whether now is a good time to invest. I think taking some perspective can help you.
Now, why did we see that strength? Well, the strength in equity markets was once again driven by enthusiasm around the soft-landing narrative. Last week, we got a couple of data points that helped support this idea that the US economy will manage to continue to grow while inflation will continue to decline.
First off, we got the US retail sales that beat expectation. They were up 0.6% month on month. On the other hand, we also got the University of Michigan survey, which showed a big jump in confidence, 78.8, when the consensus anticipated 69.5, alongside a drop in inflation expectations, and this is really the key point for markets. The one-year-forward inflation expectation fell 0.2 percentage points to 2.9%, which is, in fact, the lowest level since September 2020.
Meanwhile, closer to home in the UK, the data was a bit more mixed. Retail sales actually disappointed. They were down 3.2% month on month, while inflation came in slightly above expectations. It was 4% year over year at the headline level and 5.1% at the core level. And this really is complicating the Bank of England’s task at its February meeting, on the first of the month.
The last key element at this point of the year is earnings season and it’s too early still to draw any conclusion. We’ve just had 10% of the S&P publish Q4 numbers so far, but we got a couple of interesting datapoints. First, we got a massive pre-announcement out of a company called Supermicro. For those of you who may not know it, it’s a hardware firm closely associated with AI, and that company upgraded its December quarter revenue guidance by almost 30%, and that definitely provided a strong boost to anything AI related.
We also got a positive note, I think it was from Bank of America, on Apple. Barclays Investment Bank recently downgraded Apple and, obviously, given the importance of the stock in the overall S&P 500 index weight, but this time around, the note was rather positive, which helped lift tech and Apple in particular. And we also got ongoing job cuts announcements by several tech giants, including Google, Amazon etc, which were taken up very positively by the market.
So, in summary, what does this all mean for investors? Well, not so long ago the market was looking at a 100% chance of a Fed cut in March. Fast forward to today, so in the space of three weeks or so, we’ve seen that probability drop to less than 50%. The market is gradually coming to a view that we have shared for a while, that the Fed will be patient when it comes to cutting interest rates.
What is surprising is, despite this repricing in interest-rate cut expectations and those expectations being pushed later in the year, equity markets, as we’ve discussed, have been extremely resilient. And the reason for that, in our view, is simply the fact that from the corporate side the newsflow has been, so far at least, rather positive, i.e. market participants think that the headwinds from interest rates being kept higher-for-longer is being offset by the positive tailwinds coming from the earnings side of the equation.
Now, this might be a bit optimistic. We will need to see how things play out over the next three weeks or so as we get a full download of Q4 data in terms of earnings, as well upgraded guidance for companies. In our view, the consensus remains a bit too high when it comes to earnings expectations, with bottom-up analysts looking at S&P 500 earnings growth of around 11% to 12% this year, which is at odds with the combination of lower growth and lower inflation.
But I think the most important development in recent weeks is the backup in yield, which we believe could provide investors with maybe a last opportunity to lock in yield. On that front, our view hasn’t changed. We would continue to use any spike in yield, as just seen, as an opportunity when it makes sense to extend duration in portfolios.
Right. Now, moving on to what investors should have on their agenda for this week. It will be a busy week with, in addition to earnings, a Bank of Japan policy decision that will come overnight. On Tuesday morning, we will also get the new, I’m sure, US primary result.
Following that, we will have to pay close attention to the January flash PMIs for the European Union as well as in the US. Those will hit on Wednesday. And this is going to be an important datapoint for the ECB, which will meet on Thursday, and here, as a reminder, we expect no change in policy at this meeting and a continued pushback against market expectations for an early cut.
Moving on to the rest of the week, we will get US GDP and PCE figures for Q4 on Thursday, and we close out the week with the US PCE for December. That will come on Friday and will be an important clue as to what the message might be from the Fed when they meet towards the end of the month. So, a very busy week, and a week that we’ll be very happy to debrief once we’re back in a week’s time.
In the meantime, as usual, we wish you all the very best in the trading week ahead.
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