Last week was a mixed week, with non-US equity markets generally performing well while US Treasuries weakened further as yields headed higher. In spite of a slight wobble in US equities – excluding the value-oriented Russell 2000 – I was beginning to wonder if US stocks would ever go down again following their largely one-directional run since late October. At least meme-like price behaviour in a handful of high flying stocks finally seemed to moderate towards the end of the week. Here’s what grabbed my attention in markets.
US inflation remains stubborn; Fed signals (again) “higher for longer”
Even a hot CPI report for January, released Tuesday before the open (here), only derailed risk markets for one day. US equities managed to claw back losses on Wednesday and Thursday, but Friday was a different story as January PPI – released before the market opened Friday morning – came in sharply above expectations (BLS release here). The culprit continues to be services in which demand remains robust. Alongside higher-than-expected CPI and PPI for January, first time jobless claims were lower than expected, suggesting that the US economy remains unexpectedly strong. In a nutshell, the economic data last week is screaming “higher for longer”, a position more or less confirmed during the week by various Fed officials including Raphael Bostic (Atlanta Fed President) and Mary Daly (San Francisco Fed President). US Treasury yields were under severe pressure most of the week, with yields higher across the curve, most pronounced at the policy-sensitive shorter end. Unfortunately, it has been another rough ride for UST investors so far this year.
UK slips into recession although Jan retail sales offer glimmer of hope
In the UK, January CPI came in slightly lower than expected, suggesting an ongoing slowdown in demand. Rather uncomfortably, CPI is running at 4%/annum, well above the Bank of England’s target rate. Perhaps not surprisingly given recent data releases, GDP for 4Q23 indicated that the UK economy declined 0.3% in the quarter (ONS data here). Following a 0.1% decline in 3Q23, the UK is officially in a technical recession, albeit shallow for the time being. Friday brought a glimmer of hope as UK retail sales data for January came in better than expected, although analysts were quick to note that this followed rather dismal sales in the all-important month of December.
Japan also falls into recession
Japan also surprised investors as its economy shrank ever so slightly in 4Q23 (by 0.1%). This follows a decline of 0.8% in Japan’s GDP in 3Q23, also technically placing the Japanese economy in recession. Slower-than-expected growth driven by sagging domestic demand could push out the beginning of the normalisation of interest rate policy by the Bank of Japan, which weighed on the Yen but sent Japanese equities up sharply again.
S&P 500 company earnings remain solid
Nearly 80% of S&P 500 companies have now reported earnings, and they continue to be better than anticipated, with the bottom line up 9.9% YoY according to LSEG I/B/E/S. There are two good summary reports I follow each week during earnings season:
33 additional companies in the S&P 500 report earnings this week, including mega US “box” retailers WMT and HD on Tuesday (following the Monday holiday) before the open.
Dollar strengthens; Yen drifts back above ¥150/$1.00
As the US economy continues to diverge from weaker growth in the UK, Europe and Japan, the US Dollar remains firm. Economic data is continuing to reinforce my view that the order of monetary policy easing will be ECB first, BoE second and Fed third. This is also supporting the US Dollar, which is up 2.9% YtD vis-à-vis the USD index. Strong US economic data and weak Japanese economic data caused the Yen to weaken below the important technical threshold of ¥150/$1.00 mid-week, before it recovered just enough to close barely better than that level on Friday.
Oil prices rise, geopolitical risk heightens
Oil prices also increased week-over-week (WTI crude price +3.1%), at least partially attributable to ongoing concerns around geopolitical risk in the Middle East and Ukraine.
Market holidays
Financial markets in China have been closed since February 9th and will reopen on Monday, following the six-day market closure for the Chinese New Year holiday. It will be very interesting to see if the long break has had a positive or negative effect on the relatively poor sentiment in Chinese equities so far this year. Japanese financial markets were closed this past Monday for National Founding Day. US markets are closed this coming Monday for Presidents Day.
MARKETS LAST WEEK
With the context of economic data discussed above, markets were mixed this past week.
Global equities were largely positive with the exception of the S&P 500, which lost ground (only slightly) last week following an amazing run since late October. European markets were solid, although Japanese equities were the star of the week (+4.3% WoW) as investors cheered weak economic data (remember “bad news can be good news”) on the basis that the Bank of Japan will remain super accommodative for longer.
US equities were weaker albeit slightly, with the tech-heavy NASDAQ being the weakest performing index and the small-cap heavy Russell 2000 being the best. Tech stocks look richly valued, so it was not surprising to see some of the most-followed tech stocks weaken last week. The solid performance of the Russell 2000 in light of higher UST yields is good news for value investors, with the index recovering nicely in February so far following a dismal January.
US Treasury yields were higher across the board, most pronounced at the policy-sensitive short-end of the curve. The yield on the benchmark 10y UST closed at 4.30%, +13bps higher WoW following strong CPI and PPI releases for January in the US
As mentioned already, the US Dollar continues to steadily strengthen with Fed commentary and economic data both supporting “higher for longer”. Gold weakened slightly on the week, and oil prices increased.
The price of Bitcoin continued to push higher having now breached the $50,000 threshold, a level it has not reached since early 2021. The benchmark cryptocurrency increased 10.6% WoW and is up 23.9% YtD. Fast money momentum traders have latched onto BTC like they have meme-like tech stocks, as it looks like “easy money” (until it’s not).
MY TRADES THIS WEEK
I cleaned up some covered calls I had that were set to expire on Friday, slightly reducing my positions in AMZN, MSFT and CRWD. I also added scraps to V, MO, CSCO and XLE on weakness. These slight moves are screaming “defensive” although it’s hard – and perhaps risky – to bet against this momentum-driven market. For what it’s worth, I also rolled some SPY puts from April to June to lengthen my downside protection.
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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