Fed Rate Hike Fears Vanish

For the week ending 3 May 2024

As of midday Friday, global equities were higher on the week as fears over the potential for the US Federal Reserve to shift gears toward rate hikes vanished. The yield on the US 10-year Treasury note fell 17 basis points on the week, to 4.50%, while the price of a barrel of West Texas Intermediate crude oil fell to $78.75 from $84. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 13.8 from 15.4 last Friday.

MACRO NEWS

Softer-than-expected payrolls send US yields lower

Markets breathed a sigh of relief on Friday morning as yields on US Treasuries tumbled after April nonfarm payrolls grew a less-than-expected 175,000. The number fell considerably short of the 240,000 consensus forecast, and the prior-two-months reading was revised down by 22,000. The unemployment rate rose to 3.9%, up 0.1% from March, while average hourly earnings grew less than anticipated. Along with a rise in job openings data released earlier in the week, investors are seeing signs that tightness in the labor market is easing. After the data, markets were quick to price in a second rate cut by the Fed before the end of the year, with the first fully priced for September.  Additional soft data were reported midmorning on Friday as the Institute for Supply Management’s nonmanufacturing index fell to 49.4, the lowest reading since December 2022.

Fed’s Powell says rate hikes unlikely

Ahead of Wednesday’s press conference following the latest Federal Open Market Committee meeting, markets were primed for a “hawkish hold” after a series of hotter-than-expected inflation prints. Instead, Fed Chair Jerome Powell said it is “unlikely” the next policy move will be a hike and that rate cuts remain the Fed’s base case, only later than expected. Additionally, the FOMC voted to slow the pace of quantitative tightening by more than expected beginning in June, allowing $25 billion a month of Treasuries to roll off the balance sheet from the current $60 billion a month. Markets expected a $30- billion-a-month pace. Powell said he remains confident that inflation will moderate over the balance of the year, though he is less confident than he was earlier. The post-meeting FOMC statement acknowledged that there has been a lack of further progress toward the committee’s 2% inflation goal in recent months. Markets rallied strongly after Powell took hikes off the table, though the gains faded away late in Wednesday’s session and stocks closed lower on the day, though they rallied on Thursday and early Friday.

BOJ acts to stabilize yen

The Bank of Japan intervened several times this week to try to halt the yen’s rapid slide. On Monday, the currency fell to 160.17 versus the US dollar, a fresh 34-year low. It recovered to 152.35 after authorities purchased nearly $60 billion worth of yen on foreign exchange markets during the course of the week and on Friday’s news that the growth of US payrolls has slowed. Wide interest rate differentials, particularly between Japan and the US, have helped undermine the yen. On Thursday it was reported that Japanese authorities are considering tax breaks on the repatriation of Japanese corporate profits held overseas, which would prompt companies to buy yen, creating a capital inflow. While Japan has substantial US dollar-denominated currency reserves, selling them would require the BOJ to liquidate some of its holdings of US Treasuries, potentially pushing up US yields and exacerbating the interest rate differential, which illustrates the difficulty Japan faces in stabilizing the yen if it does not adjust monetary policy to narrow the US–Japan rate gap. 

QUICK HITS

The US employment cost index rose 1.2% quarter over quarter in Q1, more than the consensus forecast for a 1% rise. It was the largest gain in a year, fueling sticky-inflation fears.

The OECD raised its 2024 global growth forecast to 3.1% from an earlier 2.9% projection, noting more optimistic outlooks for the US, China and India. Its 2025 forecast is 3.2%.

Amid solid earnings growth, Goldman Sachs raised its forecast for US stock buybacks to $925 billion, a 13% year-over-year increase. The firm also forecasts that STOXX 600 companies will return 5% of their market cap via dividends and buybacks this year.

The US Treasury will borrow $243 billion during Q2, $41 billion more than its late January estimate. The Q3 borrowing estimates is $847 billion. The department will increase bill auction sizes in the coming days while keeping bond auction sizes steady in the May to July quarter. A program to buy back off-the-run Treasuries to increase liquidity is set to begin on 29 May.

The Canadian economy grew a weaker-than-expected 0.8% year over year in February.

China’s Politburo this week signaled both support for the country’s ailing property sector and a willingness to cut interest rates. Officials will research ways to deal with unsold properties and make flexible use of tools to support the economy and lower overall borrowing, the official Xinhua News Agency reported Tuesday. 

Taiwan's economy expanded at the fastest pace in almost three years in the first quarter as the demand for artificial intelligence boosted tech exports. Also this week, South Korea reported a rise in exports due to foreign demand for semiconductors and autos.

More than $38 billion worth of US office buildings are threatened by defaults, foreclosures or other forms of distress, according to MSCI. That’s the highest amount since the aftermath of the global financial crisis.

The Case-Shiller US national home price index rose 6.4% year over year in February.

The Conference Board’s consumer confidence measure slumped to 97 in April from a downwardly revised 103.1 in March.

US Secretary of the Treasury Janet Yellen warned that the US needs to take significant steps to reduce its budget deficit.

The US Drug Enforcement Administration has begun the process of reclassifying marijuana as a less dangerous drug.

On Thursday, Turkey halted all trade with Israel.

On Tuesday, the US Congress passed a bill to ban the import of enriched uranium from Russia. President Joe Biden is expected to sign the measure into law.

Brazil’s sovereign credit rating was affirmed at Ba2 by Moody’s, and the credit rating agency lifted the country’s outlook to positive from neutral on stronger economic growth.

According to the most recent US job openings and labor turnover survey, better known as JOLTS, the number of job openings declined in March to the lowest level in three years, 8.5 million, from an upwardly revised 8.8 million, a sign of cooling demand for labor. The quits rate fell to 2.1%, its lowest level since August 2020, as workers are deciding to stay put rather than seek greener pastures.

The US manufacturing sector slipped into a mild contraction in April, according to the Institute for Supply Management’s manufacturing index. The measure declined to 49.2 in April from 50.3 in March, though its prices-paid index jumped to 60.9, its highest level since June 2022.

According to a Pew Research Center survey, as many as 42% of Americans see China as an enemy of the US, up from only a quarter two years ago.  

On Thursday, Argentina slashed official interest rates to 50% from 60%. Radical efforts to cut government spending could see inflation fall below 10% month over month in April, President Javier Milei said this week. Interest rates were pegged at 133% when Milei took office in December. 

EARNINGS NEWS

With about 80% of the constituents of the S&P 500 Index having reported for Q1 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings slightly rose around 4.9% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 4.1% year over year. According to Bloomberg, about 80% of reporters have beaten estimates.