Markets Weekly podcast – 29 January 2024

Julien Lafargue: Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist, and once again I will be your host today.

You might be tired of hearing only me. The reality is that the team has been very busy travelling the world, talking to and meeting clients. I’m actually on my way to Dubai this week, before Dublin next week. So, hopefully, we’ll resume a normal schedule soon, in the meantime, please bear with me.

So, as usual, we’re going to be looking at what happened last week and do a bit of a preview of what’s coming up. In terms of last week, it was a fairly busy week, probably not as busy as the one to come, but, a few more important datapoints.

One of the main ones, and definitely in Europe, was the ECB meeting and the policy decision. No real surprise there. The ECB reiterated that it will remain data dependent. Of course, it keeps rates unchanged, and President Lagarde stood by the comments she made a couple of weeks ago that rate cuts could come as early as the summer, without necessarily closing the door to a potential first cut in April. 

And the reason for that is, when asked, she noted that wage growth is declining, and emphasised the importance of waiting until late April for a complete Eurostat wage-growth dataset, which means that we could have a first cut by April. This is definitely what the market is anticipating at the moment, and, to us, that seems a reasonable expectation.

Still in Europe, but in the UK this time, data came in on the firmer side, and somewhat reinforced expectations that the BoE will more likely ease policy later than the Fed and the ECB. The flash PMI surprised on the upside for January, with a composite reading hitting a seven-month high of 52.5, after the services reading recorded an eight-month peak of 53.8. And at the same time, the downturn in manufacturing slowed somewhat, to 47.3, that was up from 46.2. So, a pretty solid set of data from the UK.

The macroeconomic picture in the UK remains mixed. A week ago, the data wasn’t that particularly strong, including retail sales, but it’s probably one of the economies that is showing some signs of life. Leaving the US to one side, but definitely the UK economy seems to be behaving better than the eurozone, at this stage. 

So now, moving on to the US, a very important data release confirmed the narrative of a ‘soft’ landing, and that was the Q4 GDP figures. They came in at 3.3%, that is an annualised rate, which was well ahead of the consensus expectation of around 2%. Again, one of the key drivers behind the US economy’s resilience was consumer spending, with the release noting strength in both services and goods. So, growth is still holding up very nicely, and, at the same time, we got positive news on inflation in the form of the PCE reading for December.

Data there showed that the rate of price increases slowed as 2023 came to a close. Headline PCE was 0.17%, and so did the core PCE. At the headline level, this was in line with consensus. The consensus was looking for 0.2%. It was up though, slightly, from last month’s decline of 0.07%. 

But, overall, if you look at the trend, and one way of doing that is just to look at the six-month annualised rate for core PCE, which is what the Fed seems to be focused on when it comes to assessing the dynamics of inflation in the US. When you look at this rate, we’ve been at 1.9% now for a couple of months, which means that we’re very close, if not already, to being below the Fed’s target. So, growth is resilient, inflation is coming down. 

Lastly, we would expect the FOMC this week to acknowledge the progress being made and, potentially, even to lean into market expectations of a rate cut in March being possible. Now, the probability of such a cut is around 50% at this point in time. It was 100% a couple of months ago, but there is still a question as to whether the Fed will want to wait for May or take action earlier in March, and we’re probably going to have some degree of clarity around that next move later this week.

Now, one thing to keep in mind is that it’s important to focus more on why is the Fed cutting rates, rather than the when. It wouldn’t make such a difference if it was in March versus May. What would make a big difference is if the Fed were to cut interest rates because the economy is slowing down meaningfully, versus what seems to be the case at this point, a soft-landing scenario.

Now, finally, from last week, quite a lot of news is coming out of China. Over the weekend we had the news that, as expected, the real-estate developer Evergrande has been forced into liquidation. The market doesn’t seem to have really reacted to that, simply because it was well expected. 

The other important piece of news that we got last week from China, was the fact that, according to some Bloomberg reports, the Chinese authorities are looking to mobilise around $280 billion to stabilise the slumping stock market. As we know, the domestic equity market has been one of the key disappointments of 2023, and partly 2022. This market has been hitting five-year lows, and it looks like the Chinese authorities have had enough, so to speak, and are trying to improve the mood around the region’s equity market.

We’ve had a lot of news around that in the past few months and none of it has really stuck much. It always led to an important, but relatively short-lived, bounce. We’ll see if it is different this time, but, as markets continue to drift lower, it looks like the pressure is mounting on the Chinese authorities to do something to turn around not only their economy but also the equity market. So, China is a potential wildcard for 2024, and this is something that we’re going to be monitoring very closely.

So, what does this all mean for investors? Well, the soft-landing scenario is still the base case for markets. And earnings, we haven’t mentioned them, have generally surprised to the upside, at least for the companies that are relevant for the overall market.

The Fed could pour cold water on hopes for a marked rate cut later this week, but, in our view, this is unlikely to destabilise markets. For this, we would really need data, whether it’s on the macro or the micro front, to start disappointing, and this may be a few weeks away. So, for now, the markets seem to be well supported. Beyond the next few weeks, we still believe that investors should proceed with caution. That doesn’t mean hiding in cash, it means just being mindful of the risk and being properly diversified. 

Finally, a quick look at the agenda for this coming week. It should be even busier than last week. We’re going to have around a third of S&P 500 companies reporting earnings, which will definitely keep us occupied. On top of that, as mentioned, we will hear from the Fed on Wednesday. We will also get the Bank of England’s decision and the eurozone inflation figure for January on Thursday, and we will close out the week with the BLS, providing us with the latest US nonfarm payroll data on Friday.

So, definitely a lot to discuss next week, when we’re back. In the meantime, as always, we wish you the very best in the trading week ahead.