Markets last week: inflation data and Japan
CPI (release here) and PPI (release here) for February came in hotter-than-expected in the US, but it seemed to hardly matter to equity investors, at least when the data was first released mid-week. Bonds were an entirely different story though, as yields spiked across the curve following the release of the inflation reports along with other “blinking green” economic indicators, including retail sales and first time jobless claims. These latest releases were just a continuation of the string of data reminding investors of the on-going resiliency of the US economy. As the week drew to a close, the combination of stubborn inflation (pushing yields higher), mixed earnings, rich valuations of momentum stocks and general investor fatigue seemed to finally weigh on risk markets, too, as equities faded into the end of the week.
Outside of the US, European equities were the best performers of the week. It is an unusual week when I can say that the FTSE 100 was the week’s best performing index, but in fact this was the case last week as the UK index eked out a 0.9% gain. The worst performing equity market last week was the Nikkei 225, which gave back 2.5%. In spite of the down week, Japanese equities remain the star performing equity market YtD, up a sizzling 15.2% since the beginning of the year (more than double the YtD return on the S&P 500). The section “The Tables” provides all the usual tables showing performance across indices and asset classes last week.
What’s going on in Japan?
Heightened volatility involving Japanese assets is being caused by the pending Bank of Japan monetary policy meeting on Monday and Tuesday. Following strong wage inflation, expectations are high that the BoJ will end its negative interest rate policy and relax its yield curve control (YCC) targets as it begins to “normalise” monetary policy. This has weighed on both the Yen (strengthened) and Japanese equities (weakened), as might be expected, although the central bank’s decision is far from certain. If there is a policy shift, it will most certainly be modest and gradual going forward. It does feel odd that just as the other G7 central banks (and most other central banks) are on the verge of starting to ease monetary policy, the Bank of Japan is considering tightening it, demonstrating clearly how much the Japanese economy “marches to its own beat.”
Corporate credit (bonds)
Since I was fortunate enough to have been invited to the Crédit Agricole CIB Leveraged Finance conference this week in London, I feel obliged to say something about the credit markets. My vibe from one of the investor panels and after speaking to one or two other attendees is that credit is in stellar shape with no signs of cracking, at least not yet. Banks remain liquid and keen to lend, and credit spreads on high yield bonds continue to creep in supporting an “all is well for now” reality. A credit event is often the thing that ends euphoria in risk markets, but it is getting harder and harder to imagine such an event, at least one that might be obvious (like a deep global recession). One other interesting anecdote I gleaned is that financial sponsors are finding it increasingly challenging to identify new buyout candidates because assets broadly are so fully valued, slowing M&A activity. This of course cascades into exits and fund raising. I got a sense that private equity is proving to be a difficult business at the moment, one of the few times this can be said in many decades. It’s not a matter of portfolio companies blowing up, but rather one of new and viable LBO candidates being few and far between.
FOMC meeting (decision Weds)
The next FOMC meeting is this week with the monetary policy decision to be announced on Wednesday. It is almost a foregone conclusion that the Fed will stand still and leave monetary policy alone, so all eyes will be focused on what messages, if any, might be contained in the FOMC press release and/or the post-decision press conference/Q&A with Fed chairman Powell. The CME FedWatch Tool suggests now that the first reduction in the Fed Funds rate will occur in June (25bps), followed by two further 25bps reductions in the second half of the year. Funny how far investors were ahead of themselves and now seem to have converged on the Fed’s original timeline contained in the last dot plot (i.e. three reductions in 2024). Fortunately, even though investors’ expectations have been dampened as far as the number of interest rate reductions this year, the damage to risk markets has been non-existent so far, at least if measured by the performance of US equities YtD.
Bank of England Monetary Policy Meeting (decision Thurs)
To round out the trifecta of central bank meetings this coming week involving monetary policy decisions, the Bank of England will have its Monetary Policy Meeting on Thursday and will then announce its rate decision. It is expected that – like the Fed – the BoE will sit tight. Also similarly, it’s really all about the signals that are sent by Mr Bailey and other BoE officials following the rate decision that matters most. Market expectations suggest that the Bank Rate will be reduced around 100bps in 2024 (from 5.25% to 4.25% area).
I will remind my readers again that the order I expect to see rate reductions are ECB first, then the BoE followed by the Fed, which has been my position now since late 2023.
Noteworthy company news / stock movements
Oracle (ORCL) and Adobe (ADBE) beat earnings, with investors rewarding ORCL (+11.7% WoW) but punishing ADBE because of its weak guidance (-10.7% WoW). Tech overall had a lacklustre week in fact. Investors in Tesla (TSLA) are getting a dose of reality as far as valuation compression, with the EV leader down 34.2% YtD but still trading at 38x TTM P/E and 5.9x sales. Nvidia (NVDA) has stolen Tesla’s mantle as the mother-of-all-momentum stocks, flat on the week but still up an amazing 77.4% YtD. Personally, I feel much better about NVDA than TSLA, and I believe its valuation is probably more supportable given the macro trends in AI vs EVs. Since I wrote about anti-obesity medications this week (here and here) and the two dominant players – Eli Lilly (LLY) and Novo Nordisk (NVO) – I should highlight that LLY’s stock was down 1% WoW and NVO’s stock was down 1.6% WoW. I will publish the final instalment focused specifically on valuations of these two companies early next week. Have no allusions – as promising as the opportunity is for anti-obesity drugs globally, both LLY and NVO are richly valued. Investors need to put on their “NVDA hats” to buy either stock at these levels, thinking about macrotrends and a long-term holding period in order to support the current rich valuations.
MY TRADES LAST WEEK
On weakness I added a small amount to defensive positions in JNJ and PG. Otherwise, I am sitting tight.
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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