Week in Review: Fed Rate Hike Fears Fade

Ahead of Wednesday’s press conference following the latest Federal Open Market Committee (FOMC) meeting, markets anticipated a hawkish response due to recent higher-than-expected inflation figures. However, Fed Chair Jerome Powell surprised by stating that a rate hike is "unlikely" and that rate cuts remain the Fed’s primary scenario, albeit delayed. Amidst a plethora of data indicating persistent price pressures, Fed officials unanimously opted to maintain the target federal funds rate at 5.25% to 5.5%, a level it has held since July. Additionally, the FOMC voted to reduce the pace of quantitative tightening starting in June, allowing $25 billion a month of Treasuries to roll off the balance sheet, below the expected $30 billion. Powell also expressed confidence in inflation moderation throughout the year, although less certain than before.

The main driver behind last week's market gains appeared to be Friday's U.S. nonfarm payrolls report, showing the addition of 175,000 jobs in April, below expectations and the lowest since November. The print signalled a labour market cooldown, potentially easing inflationary pressures. Investors were also likely pleased by the unexpected slowdown in monthly wage growth. Additionally, the year-over-year wage gain decreased to 3.9%, the slowest in almost two years. Friday’s report also showed the unemployment rate rising to 3.9% from 3.8% in March amid increasing labour supply.

The Eurozone emerged from a recession in Q1 2024. Eurozone gross domestic product unexpectedly expanded by 0.3% in the first quarter, rebounding from a 0.1% contraction in the final three months of 2023. Inflation in the region remained unchanged as expected in April, but a key indicator of underlying price pressures decelerated, further strengthening the argument for the European Central Bank to implement interest rate cuts in June. Annual consumer price growth remained at 2.4%, but core inflation - which excludes energy and food prices - slowed to 2.7% from 2.9%.

The Bank of Japan intervened last week to counter the yen's decline, which hit a 34-year low against the U.S. dollar on Monday (USDJPY 160.17). By purchasing nearly $60 billion worth of yen, authorities managed to boost the currency to 152.35 by week's end, aided by news of slowed U.S. payroll growth on Friday. To address interest rate differentials, Japanese authorities are considering tax incentives for repatriating Japanese corporate profits held abroad, aiming to stimulate yen purchases and capital inflows. However, selling U.S. dollar-denominated reserves could widen the interest rate gap, presenting a challenge for Japan in stabilizing the yen without adjusting monetary policy to narrow the U.S.-Japan rate differential.

Chinese stocks climbed during a shortened trading week, buoyed by expectations of increased economic stimulus. The Shanghai Composite Index rose by +0.52%, while in Hong Kong, the benchmark Hang Seng Index surged by +4.45%. In April, China's manufacturing sector showed slight improvement for the second consecutive month, but service sector growth slowed down. A private survey also indicated ongoing expansion in manufacturing. However, industrial profits declined in March and grew at a slower pace in the first quarter of 2024, suggesting ongoing economic challenges.

As approximately 80% of S&P 500 companies have reported their Q1 2024 earnings, blended earnings per share, combining reported data with estimates for those yet to report, indicates a modest increase of approximately 4.9% compared to the same quarter last year. Sales growth stands at 4.1% year over year. Bloomberg reports that roughly 80% of companies have exceeded earnings estimates.

All major U.S. benchmarks ended last week higher, following positive economic and earnings data. The S&P 500 index rose by +0.55%, the Dow Jones increased by +1.14% while the Nasdaq Composite gained +1.43%. The yield on the U.S. 10-year benchmark fell 14 basis points over last week.

In Europe, the Euro Stoxx 50 index declined by -1.71%, whilst the UK’s FTSE 100 index rose +0.90%, driven to a fresh high by strength in mining and energy stocks. Japan's stock market rose, with the Nikkei 225 gaining +0.79%. Oil prices (Brent) fell -6.01% while Gold moved -1.54% lower.

Market Moves of the Week:

In positive news for South Africa (SA), Absa Group's Purchasing Managers' Index, rose to 54 in April from 49.2 the previous month (above 50 indicates expansion), surpassing analysts' expectations of a modest increase to 50.5. According to the lender, the improvement in business conditions in the factory sector is likely attributed to more than 30 days without load-shedding. Relating to this development, Eskom cited sustained improvement in generation by coal-fired plants, sufficient emergency reserves, and decreased demand for Eskom power.

The SA fiscal data release for March reveals a significant outperformance of nearly R7bn compared to the FY23/24 budget balance forecast. This was primarily driven by a revenue overshoot of R9.6bn, which was only marginally offset by a slight expenditure overrun of approximately R2.7bn. This contradicts the doubts held by many investors regarding the government's capacity to meet the fiscal forecasts for FY23/24.

March’s trade surplus decreased slightly to R7bn from R13bn in February, with imports rising by 6.1% m/m and exports by 1.8% m/m. However, the year-to-date surplus of R10.8bn marks a notable improvement from the R5.7bn deficit during the same period last year.

The JSE gained +1.40% over the trading week, with Industrials (+3.17%) leading the advance. Resources (-3.40%) fell as commodity prices stalled. The local currency strengthened against the U.S. dollar over last week, falling to R18.50/$ from the previous week’s R18.78/$ level.

Chart of the Week:

Market rate cut expectations have been declining after each of the past 5 FOMC meetings. Post Wednesday’s meeting there was only 1 rate cut priced in from the Fed for 2024, as we end the week, there are now two cuts priced in post the release of Friday’s payroll data, with no chance of a rate hike for this year expected. About 70 percent of bets implied that rates would be lower after the Fed’s September meeting. Source: Financial Times, Yahoo!finance.