Will US rate cuts be derailed this year?

Will US rate cuts be derailed this year?
  • Markets in April
  • Global market indices
  • Currencies
  • Cryptocurrencies
  • Fixed Income
  • Commodity sector news
  • Key events in May

Markets in April

The S&P 500 suffered a 4.16% loss in April, marking its steepest decline since September and a stark contrast to its robust first-quarter performance – the best since 2019. The Nasdaq 100 and Dow mirrored this trend, experiencing monthly losses of 4.46% and 5.00%, respectively.The NYSE was -3.87%. Corporate earnings season has had a good start.

According to LSEG I/B/E/S data the 24Q1 Y/Y adjusted blended earnings growth estimate is 9.7%. If the energy sector is excluded, the growth rate for the index is 9.7%. Please note that the 24Q1 year-over-year growth rate for Bristol Myers Squibb reflects an approximate $12 billion one-time charge related to its acquisition of Karuna Therapeutics. When including this one-time item, the S&P 500 24Q1 earnings growth rate declines to 6.6%. Of the 310 companies in the S&P 500 that have reported earnings to date for 24Q1, 77.4% reported above analyst expectations. This compares to a long-term average of 66%. The 24Q1 Y/Y blended revenue growth estimate is 3.7%. If the energy sector is excluded, the growth rate for the index is 4.4%.

US Treasury yields experienced a significant upward trend in April, impacting bonds of all maturities. The 10-year Treasury note witnessed its largest monthly increase since September of 2022, with a yield rise of 49.6 basis points (bps). Similarly, the longer-term 30-year Treasury bond saw its yield climb 45.4 bps, marking the most substantial monthly gain since September of 2023. The yield on the 30-year bond reached 4.767% at the close of April. The 2-year Treasury yield hit its highest level since November, climbing to 5.05% after a monthly increase of 42.1 bps, the most significant rise since June of 2023.

Mirroring the US market, eurozone bond yields also exhibited a general uptick across the curve in April. The German 10-year yield rose by 29.7 basis points. The yield on the longer-term 30-year German bond climbed 24.6 bps, reaching 2.701% at the month's end. The German 2-year yield rose by 22.3 bps to close April at 3.056%.

The Economic Picture

The Federal Reserve, as widely expected, kept rates on hold again on Wednesday. Although the Fed was not as hawkish as had been feared, it is clear that the Fed will be on hold for quite a while longer. Fed Chair Jerome Powell said.“So far this year, the data have not given us that greater confidence in particular that rate cuts are appropriate. Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected.” Powell said he still expects inflation to ease over the course of this year

In a move that soothed markets, the Fed indicated that it was not yet considering new rate rises to counter the recent uptick in inflation, with Powell saying “I think it’s unlikely that the next policy rate move will be a hike.” However, it does look like cuts will be delayed further if inflation proves more persistent than expected and the labour market remains strong. "There are paths to not cutting and there are paths to cutting. It's really going to depend on the data," Powell said. IN short, Fed cuts appear delayed but still on track for this year.

The US economy appeared to be slowing slightly in April with the flash US PMI Composite Output at 50.9, down from March’s: 52.1 and a 4-month low.The US Services Business Activity Index came in at 50.9 vs March’s 51.7 and was at a 5-month low. According to the Bureau of Economic Analysis, US GDP rose at a modest 1.6% annualised rate in Q1, primarily supported by consumer spending, falling short of the anticipated 2.4% increase. It was the slowest pace since the second quarter of 2022. Headline CPI increased 0.4% in March after gaining 0.4% in February. On a year-on-year basis, inflation rose by 3.5% in March. Core CPI rose 3.8% y/o/y. The Employment Cost Index (ECI), considered the most comprehensive measure of labour costs, rose by 1.2% in Q1 2024 compared to 0.9% in the previous quarter. Labour costs have grown by 4.2% y/o/y and wages by 1.1% in Q1.The Fed’s preferred price gauge was up 2.7% in March on a y/o/y basis. Excluding food and energy, it advanced 2.8%. Inflation-adjusted consumer spending climbed a larger-than-forecast 0.5%, the biggest gain this year. Consumer confidence also fell in April with the Conference Board stating that its consumer confidence index deteriorated in April, falling to its lowest level in more than 1-1/2 years. The Conference Board said that its consumer confidence index fell to 97.0 in April, the lowest level since July 2022, from a downwardly revised 103.1 in March. US consumer sentiment was revised lower to 77.2 in April 2024 from a preliminary of 77.9, and compared to 79.4 in March which was the highest level since July 2021. 

Although the labour remains relatively tight, weakness is starting to emerge. Job openings were down 325,000 to 8.488 million on the last day of March, the lowest level since February 2021. Data for February was revised slightly higher to show 8.813 million unfilled positions. The number of people quitting their jobs dropped 198,000 to 3.329 million in March, the lowest level since January 2021. The decline in resignations was concentrated in trade, transportation and utilities, as well as other services. The quits rate, viewed as a measure of labour market confidence, fell to 2.1%, the lowest since August 2020. Nonfarm payrolls rose by 303,000 in March. Data for February was revised slightly lower to show 270,000 jobs added instead of 275,000 as previously reported. Average hourly earnings for nonfarm employees rose by 0.3%, in March after an upwardly revised 0.2% rise in the prior in February. At 4.1% over the year, it is still above the level the Fed said is necessary to achieve the 2% inflation target. Retail sales increased 0.7% in March with core retail sales jumping 1.1%.

In the eurozone ECB Chief economist Philip Lane said that wage and service costs remain high. He noted that headline inflation is expected to fluctuate around current levels in the near term on account of base effects in the energy component and the reversal of the upward effect of the early timing of Easter on services inflation in March.” Headline inflation came in at 2.4% for the second month in a row in April. Core inflation slowed to 2.7% from 2.9%. The ECB has placed a strong emphasis on first quarter wage data, due out in late May. However, the ECB has virtually promised a rate cut in June as long as there are no surprises in wage or price developments. The eurozone GDP increased by 0.3% quarter-on-quarter in January-March for a 0.5% year-on-year rise. Q4 GDP was also revised down to a negative 0.1% from a previous 0.0%, meaning that the euro zone was in a technical recession in the second half of 2023. In terms of eurozone business activity, the euro area grew at the fastest rate for nearly a year in April with the flash HCOB composite PMI rising from 50.3 in March to 51.4 in April. According to S&P, this was a second successive month of rising output after a continual decline over the nine months to February. The April expansion was the strongest since May of last year. The services sector output grew for a third successive month, with the rate of increase having gained momentum to register the fastest rise for 11 months, while manufacturing output fell across the eurozone for a thirteenth straight month.

In the UK, the economy has been slowly improving. The S&P Global Composite PMI came in at 54.0, up from March’s 52.8 and an 11-month high. The Services PMI rose to 54.9 in April 2024 from 53.1 in March. However, the Manufacturing PMI came in at 49.in April, down from the 50.3 recorded in March. According to PwC, it is due to supply chain disruption and market uncertainty continuing to impact trading conditions. Inflation was 3.2% y/o/y in March 2024 from 3.4% in the previous month but remained slightly above the market expectation of 3.1%. It was the lowest rate since September 2021. On a monthly basis, CPI rose by 0.6% in March, the same as in February. Core inflation, which excludes food and energy, dropped to 4.2%, the lowest rate since December 2021. The labour market is loosening, with the unemployment rate for December 2023 to February 2024 at 4.2%, down from 3.9%. Wage growth came in 6.0% in December 2023 to February 2024, and annual growth in total earnings (including bonuses) was 5.6%. Markets are now expecting the first rate cut in September In addition, British consumer sentiment remained stable, with households even expressing a positive outlook on their personal finances for the first time in over two years.

Global Market Indices

US

S&P 500 -4.16% QTD and +5.57% YTD
Nasdaq 100 -5.10% QTD and +2.95% YTD
Dow Jones Industrial Average -5.00% QTD and +0.34% YTD
NYSE Composite -4.02% QTD and +4.29% YTD

Europe

Stoxx 600 -1.63% QTD and +5.29% YTD
DAX -3.03% QTD and +7.05% YTD
CAC 40 -2.69% QTD and +5.86% YTD
FTSE 100 +2.12% QTD and +5.02% YTD
IBEX 35 -1.99% QTD and +7.45% YTD
FTSE MIB -2.89% QTD and +11.19% YTD

According to LSEG I/B/E/S data, first quarter earnings are expected to decrease 8.8% from Q1 2023. Excluding the Energy sector, earnings are expected to decrease 5.2%. First quarter revenue is expected to decrease 4.6% from Q1 2023. Excluding the Energy sector, revenues are expected to decrease 3.7%. As of 30 April 136 companies in the STOXX 600 have reported earnings to date for Q1 2024. Of these, 58.8% reported results exceeding analyst estimates. In a typical quarter 54% beat analyst EPS estimates. As of 30 April 165 companies in the STOXX 600 have reported revenue to date for Q1 2024. Of these, 49.7% reported revenue exceeding analyst estimates. In a typical quarter 58% beat analyst revenue estimates. During the week of 6 May, 67 companies are expected to report quarterly earnings.


Global

MSCI World Index -3.85% QTD and +4.30% YTD
Hang Seng +7.39% QTD and +4.20% YTD

Mega cap stocks had a mixed April with Meta Platforms -2.05%, Amazon -3.30%, Alphabet +4.69%, Microsoft -8.30%,Nvidia -4.38%, Tesla +4.60%, and Apple +0.18%

Alphabet surpassed analyst expectations for sales and announced a dividend. Its valuation was pushed above the $2 tn mark.Total revenue reached $67.6 billion for Q1, surpassing the average analyst estimate of $66.1 billion. EPS came in at $1.89, exceeding Wall Street's projection of $1.53.

Microsoft reported robust financial results for Q1 fueled by surging demand for the company's cloud computing services (Azure) and AI offerings. Its EPS of $2.94 significantly surpassed the projected $2.82, while revenue of $61.9 billion outpaced the anticipated $60.9 billion. Notably, the company's AI-focused intelligent cloud division reported operating income of $12.5 billion, exceeding estimates of $12.1 billion.

Meta Platforms delivered a record-breaking first quarter, boasting a 27% year-over-year increase in revenue to $36.5 billion. Q1’s growth marked the third consecutive period exceeding 20% year-over-year increases. However, investor enthusiasm for Meta's AI vision was tempered by forecasts of rising costs. Meta revised its capital expenditure projections for 2024 to a range of $35 billion to $40 billion, upfrom a previous estimate of $30 billion to $37 billion. Furthermore, Meta's second-quarter revenue forecast of $36.5 billion to $39 billion fell short of analyst expectations.

Tesla CEO Elon Musk outlined a renewed focus on producing more affordable electric vehicles during the company's earnings call and he emphasised Tesla’s commitment to achieving a fully autonomous car. He discussed a dedicated robotaxi model and a corresponding ride-hailing network. Tesla's operating margin narrowed substantially, dropping from 11.4% to 5.5% year-over-year. Its quarterly net revenue was -9.0% to $21.3 bn vs $22.3 bn expected. Its Adjusted EPS at $0.45 vs. $0.52 expected.

Energy stocksexperienced a negative April with the energy sector -0.87% in April and +11.70% YTD by the end of April. WTI was -2.13% and Brent +0.50% in April. Phillips 66 -12.32%, Shell +1.56%, Halliburton -6.16%, Apa Corp -10.98%, Marathon Petroleum -11.10%, Occidental Petroleum Corporation -0.36%, ExxonMobil +1.09%, Chevron +1,38%, and Baker Hughes Company -2.45%, and Energy Fuels -20.67%.

ExxonMobil announced a final investment decision (FID) for the Whiptail development, located offshore Guyana. It is the sixth project undertaken within the Stabroek block. By the end of 2027, after a projected $12.7 bn investment, Whiptail is expected to add an estimated 250,000 barrels of oil per day.

Energy Fuels announced the acquisition of Base Resources' 100%-owned Toliara heavy mineral sands project in Madagascar ("Toliara" or the "Project"), which includes a long-life, high-value and low cost monazite stream, produced as a byproduct of primary titanium and zirconium production.

Materials and Mining stocks had a mixed month in April. The materials sector was -4.61% in April but +3.44% YTD by the end of April. Gold prices remained strong. In April Freeport-McMoRan +5.51%, Newmont Mining +11.56%, Nucor Corporation -15.74%, Sibanye Stillwater -2.38%, Yara International -8.45%, Mosaic -3.21%, Celanese Corporation -10.24%, and Albemarle -6.87%.

Newmont reported quarterly net revenue for Q1 at +50.2% to $4.0 bn vs $3.4 bn expected. Its adjusted EPS came in at $0.55 vs. $0.36 expected.

Albemarle posted revenue of $1.36 million in Q1, down 47% from the year before. The company reported an adjusted profit of 26 cents per share, below analysts' average estimate of 27 cents per share. Albemarle's biggest section, which focuses on the development and production of lithium-ion batteries used in electric vehicles, posted a quarterly adjusted core profit of $198 million, compared with $1.57 billion the previous year. Prices in the unit fell 89%. Albemarle said that in Q1 it logged more than $90 million in "productivity and restructuring cost savings," putting it on track for $280 million in productivity benefits over the course of the year.

Commodities

Oil prices remained relatively range bound in April with investors balancing continuing geopolitical risk and uncertainty around global supplies. Prices fell more than 3% to a seven-week low on Wednesday after the Federal Reserve kept interest rates steady and warned of stubborn inflation, which could repress economic growth this year and limit oil demand increases.The lack of ceasefire agreement between Hamas and Israel and drone attacks by Ukraine on Russian refineries have been supportive. OPEC released a report reiterating its earlier forecast of a 2.25 million barrel-per-day (bpd) increase in global oil demand throughout 2024, followed by a projected increase of 1.85 million bpd in 2025. Oil was also lifted during April by signs that China may be increasing demand after its GDP grew 1.6% in the first quarter, above the forecast for growth of 1.4%. However, US crude oil and gasoline inventories are rising with crude stocks at their highest point rose unexpectedly last week as refineries slowed downrunning rates, the Energy Information Administration said on Wednesday. Crude inventories rose by 7.3 million barrels to 460.9 million barrels in the week ended 26 April, the EIA said. Crude stocks were at the highest point since June, driven by a large 6.8 million-barrel rise in Gulf Coast inventories.

Gold prices remained largely supported in April despite the dollar continuing strength and yields rising. Gold has been supported by its status as a safe haven asset given ongoing geopolitical risk in the Middle East. It has also been supported by central bank purchases including by the PBoC. Chinese gold consumption in the first quarter of 2024 climbed by 5.94% from a year earlier on soaring safe-haven demand. Buying by the Chinese central bank, the PBoC, continued for a 17th straight month in March, bringing the total gold reserve to 2,262.67 tons by end-March.

Currencies

The dollar gained ground against the British Pound and euro in April, reaching a five-month high against the euro in mid-April. Sterling fell on GBP -1.64% YTD against the USD. The BoE is widely expected to begin easing policy in September as the economy continues to recover and inflation slows. The EUR -2,94% YTD against the USD. With inflation remaining at 2.4% for the second month and growth showing signs of recovery, the ECB has pretty much guaranteed a first cut inJune despite its concerns over continuing wage pressures as the eurozone labour market remains tight, with unemployment at record low levels. However, the ECB does remain wary that a divergence in policy with the US will lead to devaluation. ECB vice-president Luis de Guindos told Le Monde that the central bank "would need to take the impact of exchange rate movements into account." He also highlighted potential risks associated with transatlantic divergence on rates, including increased "capital flows" from Europe to the US and heightened risks for the banking sector.

Cryptocurrencies

Bitcoin +32.74% 3 Months and +36.43% YTD
Ethereum +27.47% 3 Months and +28.49% YTD

Bitcoin fell almost 16% in April, experiencing its worst month since November 2022 despite the much anticipated quadrennial halving on 20 April largely due to growing concerns around the speed and timing of US interest rate cuts and slower flows into Spot Bitcoin ETFs. It has also been affected by the rise in global geopolitical risks which have pushed investors towards safe haven assets. There were still bright spots for Bitcoin and Ether as the Hong Kong Securities and Futures Commission (SFC) approved the launch of Spot Bitcoin and Ether exchange-traded funds (ETFs).

Fixed Income

US Treasuries 10 year yield to 4.63%.
German 10 year yield to 2.58%.
UK 10 year yield to 4.37%. 

Treasury yields rose again in April as.inflation data continued to surprise to the upside, despite softer growth data. Fed Chair Jerome Powell’s message on Wednesday that "Inflation is still too high and further progress in bringing it down is not assured and the path forward is uncertain” did worry markets. However, his comment that he still expects inflation to ease this year helped Treasuries to climb across the curve, with two-year yields dropping below 5%. Nevertheless, three straight months of disappointing inflation figures has resulted in a repricing of interest-rate expectations, with futures markets now showing just one cut this year. Yields were also pushed lower on Wednesday by the Fed’s announcement of a larger-than-expected reduction in balance sheet runoff under the Fed's quantitative tightening program. 

In Europe, the ECB has virtually guaranteed that the first rate cut will take place in June. With headline inflation remaining at 2.4% for the second month, core inflation falling slightly and renewed signs of growth in the eurozone economy, the question is how quickly will the first cut be followed by a second, with ECB President Lagarde insisting that the ECB will remain data dependent. Some ECB officials are being cautious, with German central bank president Joachim Nagel saying that although he is in favour of a rate cut in June, “such a step would not necessarily be followed by a series of rate cuts." Similarly, Austria's central bank head Robert Holzmann expressed his reservations: "I would find it difficult if we move too far away from the Fed." 

In the UK, the Bank of England, while still likely to keep rates on hold again next week, is seeing a growing division on how quickly to move. Deputy Governor Dave Ramsden struck a dovish note on 19 April when he said the risk of high inflation had receded and it might prove weaker than the BoE's forecasts .However, Chief Economist Huw Pill, on 23 April, was more hawkish, suggesting that rate cuts remained some way off. At least two other MPC members, Jonathan Haskel and Megan Greene, have also warned that rate cuts may need to be delayed, with Greene citing still high wage growth as the main factor for not achieving the 2% target. Financial markets are now only fully pricing in a first BoE rate cut in September and the chances of a second move by the end of the year are seen as little more than 50-50.

Note: Data as of 5:00 pm EDT 1 May 2024

What to think about in May 2024

There are a number of risks and opportunities for investors as we move into May . Although US inflation is expected to fall throughout this year, there are concerns that the strength of the labour market, despite signs of weakness, and still high inflation, will keep the Fed from cutting until at least the end of this year, and possibly not into 2025. Investors will be focused on the implications of any delay in rate cuts, which, upuntil now, has been largely muted. They should also be looking to see if there is a broadening out from the magnificent seven stocks leading recent market growth. With the election cycle heating upin the US and debate around industrial policies and global trade likely to come to the fore in coming months, equity investors may need to be on guard. In addition, continuing tensions in the Middle East, along with continuing drone and missile attacks on commercial ships in the Red Sea and now in the Indian ocean by Yemen's Houthi group, forcing ships to take the longer route, remains a worry for inflation watchers. There is also the ongoing war in Ukraine that continues to affect energy markets in Europe as well as global prices. Food prices are also expected to rise in Europe and the UK due to extremely wet weather in the spring which affected planting..

Key events in May

The potential policy and geopolitical risks for investors that could negatively affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include:

1 May 2024 Federal Reserve Monetary Policy Meeting. The policy rate remains in the 5.25%-5.50% range. following data that pointed to lingering price pressures in the economy. The Fed also reaffirmed the need for more evidence that prices are cooling before cutting interest rates. "If we did have a path where inflation proves more persistent than expected, and where the labour market remains strong but inflation is moving sideways and we're not gaining greater confidence, well, that would be a case in which it could be appropriate to hold off on rate cuts," Powell said during the press conference. The Fed also slowed down its quantitative tightening (QT).

2 May 2024 Local elections, UK. Major urban areas, including London, Liverpool and Manchester, will hold mayoral elections. The election will provide indications of the new UK government expected later this year.

9 May 2024 Bank of England Monetary Policy Meeting, MPC Announcement, Minutes, and Monetary Policy Report publication. Following on from the March meeting, BoE Governor Andrew Bailey said rate cuts were “in play” at future meetings of the BoE Monetary Policy Committee. Headline inflation stood at 3.2% in March and is expected to fall again in April, moving further away from the four-decade high of 11.1% set in October 2022. The BoE is expected to once again keep rates on hold in May at 5.25% at its meeting. However, with growing divisions between how fast MPC members think that rate cuts should occur, there will likely be some dissent on the final BoE statement.

12 May 2024 Presidential election, Lithuania.President Gitanas Nausėda is standing for re-election, and polls put him well ahead of competitors.

20 May 2024 Presidential inauguration, Taiwan. Lai Ching-te’s inauguration is unlikely to cause a significant escalation of cross-Strait tensions.

29 May 2024 General election, South Africa. General elections will be held to elect members of the 400-member National Assembly, as well as the nine provincial legislatures. The parliament will then select the president. The ruling African National Congress (ANC) is likely to remain in power through a slim majority or through a coalition with several smaller parties. President Cyril Ramaphosa is likely to be elected for a second term (until 2029 ). South Africa’s election authorities have barred former President Jacob Zuma from standing in the country’s May election, heightening political tensions.

While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

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