Tag: inflation

Weekly Recap:

Stocks and bonds of nearly all stripes enjoyed a strong week after a “goldilocks” FOMC meeting. While there was no uncertainty going into the meeting regarding the rate decision, investors were keenly focused on the committee’s outlook for the economy and future rate decisions, as reflected by the updated Summary of Economic Projections (SEP). And on that front, the committee delivered a welcome update, upgrading its consensus outlook for 2024 GDP growth while also maintaining a median projection of three 25 basis point rate cuts by year-end.

The front end of the Treasury curve breathed a sigh of relief, with 2y yields falling 14bp while 10y yields dropped 11bp. Meanwhile, credit spreads inched tighter yet again. The average OAS on Bloomberg’s US Corporate Credit Index finished the week at 88bp, a level not seen since Q4 of 2021.

Equity investors responded with enthusiasm. All three major US large cap benchmarks (the Dow, S&P, and Nasdaq) rose to fresh all time highs on Thursday. Small caps also posted solid gains, but remain well behind tech-dominated large cap benchmarks on a YTD basis. The same is true for international stocks, which continue to lag the US due to the more cyclical, less tech-heavy nature of international equity markets.

On the macro front, the most interesting development last week was the February release of the Conference Board’s Leading Economic Index (LEI). The index rose sequentially (+0.1% m/m) for the first time in nearly two years, extending what appears to be a recent stabilization after a long, protracted decline that began at the start of 2022 (see the Chart of the Week for a time series). The improvement in the LEI seemed to offer some corroboration of the Fed’s upgraded economic outlook, and was cheered by market participants.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

Financial assets struggled last week after hotter-than-expected CPI and PPI prints tempered investors’ expectations regarding the upcoming Fed pivot.

* Headline CPI rose +0.4% m/m and +3.2% y/y (consensus = +3.1% y/y)

* Core CPI rose +0.4% m/m and +3.8% y/y (consensus = +3.7% y/y)

* Headline PPI rose +0.6% m/m and +1.6% y/y (consensus = +1.2% y/y)

* Core PPI rose +0.3% m/m and +2.0% y/y (consensus = +1.9% y/y)

In response, futures markets pulled another 25bp rate cut out of 2024, reducing the total number of implied cuts from four (100bp total) to three (75bp), while repricing the odds that the first cut will come in June from ~90% down to ~60%.

Predictably, rates moved higher across the Treasury yield curve, especially in the front end. 2y yields finished the week higher by 26bp. Credit spreads tightened on the week, softening the blow to US corporates.

Meanwhile, equities struggled across most sectors, market caps, and geographies, with rate-sensitive real estate names more heavily impacted. Small and midcap benchmarks underperformed, due in part to their higher REIT concentrations as compared to large cap indices.

In contrast, energy stocks were an upside outlier. A report from the International Energy Agency predicted a global supply deficit could persist for the balance of 2024, and US stockpiles recently saw their first drawdown in nearly two months, driving WTI and Brent crude to 4+ month highs.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.6x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

For the first time all year, technology, communications, and consumer discretionary (collectively the “growth sectors”) all underperformed the broader market last week. Meanwhile, every cyclical and defensive sector outperformed. This same sector pattern resulted in small and midcap stocks beating large caps, and international benchmarks outperforming the US.

The bond market also reflected a mild risk-off sentiment last week, with rates falling 5-10 basis points across the curve. Jerome Powell’s congressional testimony made it clear that rate cuts are coming later this year unless inflation data inflects higher, but the committee is not ready to begin monetary easing just yet.

Much of the selloff in growth occurred on Friday in the wake of the February jobs report from the Bureau of Labor Statistics. To our eyes, there was little in the report that was of particular concern.

* Nonfarm payrolls rose 275k (consensus estimate was 200k)

* Unemployment (U-3) ticked higher by 20 basis points to 3.9%

* Average hourly earnings rose 0.1% m/m, and are up 4.3% y/y

* Labor force participation held steady at 62.5%

Other labor market data was solid last week as well. Jobless claims remain low, the ADP reported a net gain of 150k payrolls, and the Job Openings and Labor Turnover Survey (aka, the JOLTS Report) tallied 8.86 million open jobs in the US, down just slightly from 8.89 million the prior month.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

Stocks and bonds rallied last week, thanks in part to a PCE inflation print that came in right on the screws. Investors watched with a wary eye after the most recent CPI report had come in hotter than expected a couple weeks prior, but PCE did not cause the same level of consternation:

* Headline PCE Deflator was +0.3% m/m and +2.4% y/y

* Core PCE  Deflator was +0.4% m/m and +2.8% y/y

Rates eased lower in response, after mostly moving higher in the early part of 2024. This brought some welcome relief to bondholders, who have watched bond prices sag over the past couple months, much as they did in the early part of last year. However, credit spreads also reversed course and moved wider last week, after reaching 2+ year tights the week before. This widening in spreads resulted in muted price gains for US corporates, relative to Treasuries.

Stocks were mostly better as well, particularly tech which pushed the S&P 500 and Nasdaq to fresh all time highs on Friday. Pockets of weakness in staples, utilities, and healthcare head back the Dow Jones Industrial Average, which remains just a hair below the record high set a week earlier.

The other notable macro news from last week was the somewhat surprising drop in consumer confidence across both widely followed measures. The Conference Board’s Consumer Confidence Index fell four points from a downwardly revised January figure to print at 106.7, reversing a 3-month uptrend. Meanwhile, the final reading of the University of Michigan’s Consumer Sentiment Index for February fell nearly three points from its preliminary estimate, printing at 76.9.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

Last week’s headline event was Nvidia’s quarterly earnings release, which investors treated as a measuring stick for the strength and durability of the boom in generative A/I. The company didn’t disappoint. Revenue and EPS growth far exceeded consensus estimates as Wall Street analysts struggle to keep up with Nvidia’s hockey-stick growth trajectory. Q1 revenue guidance of $24.0 billion also exceeded consensus estimates by nearly 10%, resulting in further revision of expectations and yet another re-rating of the stock. NVDA finished 8.5% higher on the week, despite slumping in the days prior to Wednesday’s release.

Reassurance that A/I growth continues unabated plus a benign week for rates allowed US stocks across all industries to push higher. The S&P 500 and the Dow Jones Industrial Average closed the week at fresh all-time highs, while the Nasdaq eased back just slightly on Friday after reaching a new high on Thursday.

The picture remains mixed on the macro front. On the plus side, jobless claims fell sequentially and continue to indicate a strong labor market, S&P’s US Manufacturing (51.5) and Services PMIs (51.3) printed in expansion territory in the preliminary February reading, and existing home sales ticked higher in January thanks to some moderation in mortgage rates around year-end.

However, the Conference Board’s Leading Economic Index (LEI) painted a different picture, falling for the 22nd month in a row. The index is down 7.0% on a y/y basis, and has fallen 13.4% from its peak in December of 2021. In the past, declines of that magnitude have always been followed by a US recession (see Chart of the Week).

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

Stocks were mixed and bond yields rose after higher-than-expected CPI and PPI prints dampened investors’ enthusiasm regarding near term interest rate cuts:

* Headline CPI was +0.3% m/m & +3.1% y/y (consensus +0.2% m/m & +2.9% y/y)

* Core CPI was +0.4% m/m & +3.9% y/y (consensus +0.3% m/m & +3.7% y/y)

* Headline PPI was +0.3% m/m & +0.9% y/y (consensus +0.1% m/m & +0.6% y/y)

* Core PPI was +0.5% m/m & +2.0% y/y (consensus +0.1% m/m & +1.6% y/y)

Bigger picture, the disinflationary trend largely remains in place, but as expected the final leg of the journey back to the Fed’s 2% target is proving to be a somewhat slow and bumpy ride.

In response, futures markets pushed the first “odds on” FOMC rate cut from May to June. Yields rose across the Treasury curve, particularly in the front end as market participants once again recalibrated their expectations regarding the path toward monetary policy normalization.

Meanwhile, credit spreads tightened yet again, cushioning the downside in US corporate bonds.

Finally, equity performance was strictly ordered by duration last week, with technology and other growth stocks lagging while dividend-paying cyclicals and defensives were better. Energy stocks also got a boost from rising oil prices as tensions rose in the middle east amid signs of escalation in the conflict between Israel and Hamas. Small and midcap benchmarks outperformed large caps on the week, mostly due to differences in industry composition.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

Stocks were better and bond yields rose in what was for the most part a slow week for macro data. The most consequential release was undoubtedly the ISM Services Index (53.4), which came in higher than expected across the board in January, particularly the Employment (50.5) and Price Paid (64.0) components. With services being the primary source of inflation in the US economy at this point, the strength in this print was notable and will certainly influence the Fed’s thinking.

In financial media the headline was undoubtedly “S&P 5,000”, as the S&P 500 closed above this tidy (but ultimately irrelevant) milestone for the first time ever on Friday. As was the case last year, the gains in the S&P have been very unevenly distributed so far in 2024. Once again, large cap technology stocks have driven a sizeable portion of the index’s overall performance. While the market-cap weighted S&P 500 has thus far delivered a YTD total return of 5.5%, the equal-weighted version of the index has put up a return of just 0.8%.

Bond yields rose once again last week, as market participants continue to lower their assumptions about the quantity and timing of rate cuts in 2024. Relative to year-end levels, Treasury yields are now 20-35 basis points higher across the curve, with long bond yields feeling the brunt of the selling pressure. Credit spreads were stable last week and remain at tight levels relative to long run averages.

In commodity news, oil prices spiked at the end of the week after Israel rejected a cease-fire and hostage return offer from Hamas. However, natural gas prices are at multi-year lows, and gasoline prices at the pump have only edged a few cents higher in the US after falling significantly in Q4, to the benefit of consumer confidence.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting approximately 10% EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most like beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

Weekly Recap:

Most stocks and bonds had a reasonably good week, despite disappointment (in some corners) regarding the prospects of a March rate cut.

The most important event of the week was unquestionably the January FOMC meeting, at which Fed Chair Jerome Powell made it very clear (within the constraints of Fed-speak) that the committee does not believe that economic conditions will justify a March cut. Several prominent Wall Street economists scrambled to update their forecasts (Goldman, BofA, and Barclays were all out the next morning with May as their new target), while Fed Funds Futures investors quickly repriced the odds of a March cut to a 4-to-1 long shot.

Otherwise, macro data released last week was strong, including:

* Conference Board Consumer Confidence rose to 114.8, a 2+ year high

* Manufacturing PMIs from ISM (49.1) and S&P (50.7) rose to 15m highs

* JOLTS Job Openings rose back to 9 million

* The BLS jobs report showed +353k NFPs, and 4.5% y/y wage growth

While the front end of the curve remains pinned, rates in the belly and long end finished the week lower, allowing most bonds to see solid price gains on the week. Credit spreads edged slightly wider, perhaps showing some fatigue after the strong rally in credit over the past 3 months.

Most equities were also better on the week. The energy sector was an exception, as oil prices fell markedly on reports of a cease-fire between Israel and Hamas.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting approximately 10% EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most like beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in the past few months.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

January 2024 Recap:

Inflation

Data released in January showed that as 2023 drew to a close, inflation was generally tame, but not quite tame enough for the Fed to declare victory. The Core PCE Deflator (the Fed’s preferred inflation metric) stood at +2.9% y/y as of the end of December, the first sub-3% print since March of 2021. Meanwhile, Core CPI printed at +3.9% y/y, also the lowest since the first half of 2021. While these figures are directionally encouraging, the pace of disinflation has slowed in recent months, and both metrics remain solidly above the Fed’s long term 2% target.

Monetary Policy

The main event for market participants in January was the FOMC meeting that concluded on Wednesday the 31st. While no one expected a change in overnight interest rates out of that meeting, everyone was interested in getting an answer to the question of “will they or won’t they” begin cutting rates at the March meeting. The answer, delivered as clearly as can be given the constraints of Fed-speak, is no. Jerome Powell made it very clear that the committee does not anticipate that economic conditions will justify the start of a rate cutting cycle in March.

Economy

Outside of the manufacturing sector, which mostly remains in contraction, economic data released in January was solid. Consumer confidence continues to climb, thanks in part to falling inflation that everyone can see at the gas pump. Lower mortgage rates stimulated activity in the housing sector. And the labor market remains strong: jobless claims are low (~200k initial claims per week), open jobs are plentiful (9 million per the most recent JOLTS report), and job creation continues to chug along (216k nonfarm payrolls added in the most recent monthly BLS job report).

Bond Market

The yield curve steepened in January, with 2y yields falling slightly while yields in the belly and (especially) the long end rising a bit. Longer term yields continue to be challenged by the outlook for US budget deficits, making them somewhat more attuned to the election cycle (and especially growing populist impulses across the political spectrum) that will unfold over the course of 2024. Most bond prices finished the month lower, although a contraction in credit spreads (to levels that are nearing historic tights) helped to cushion the downside in corporate bonds.

Stock Market

US large caps enjoyed a solid first month of 2024, but as was the case last year the gains were concentrated in a comparatively small number of individual stocks. Cyclicals and defensives were much more of a mixed bag, resulting in underperformance of small and midcap benchmarks that have greater exposure to such industries. International markets were mixed as well, with emerging market indices especially weak due to sharp underperformance in Chinese equities.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting approximately 10% EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most like beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in the past few months.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.