Last week’s holiday-shortened week was rather uneventful until the latter half, when US jobs, confidence and inflation data were released.
First-time jobless claims, released Thursday before the US open, re-affirmed the solid nature of the US jobs market, providing further evidence of the continued strength and resiliency of the US economy.
The University of Michigan Consumer Confidence Indicator also showed that consumer confidence increased in March, and that inflation expectations fell (here).
February PCE data, released on Friday morning (here), showed that the Fed’s preferred measure of inflation for both headline and core inflation declined to +0.3% MoM, an encouraging sign that inflation is moving in the right direction (and in line with expectations).
The Fed “talking heads” continue to be emphatic that even though inflation appears to be heading in the right direction, the Fed sees no reason to move quickly with its rate reductions. In fact, the CME FedWatch Toolsuggests (61% probability) that the Fed Funds rate will be reduced by 25bps for the first time in June, with 25bps decreases also expected in September and December.
Equities around the world continued to roar ahead last week, aside from Asian equity markets. Yields were stable to slightly better, credit spreads tightened (again), gold reached a record high, the price of oil increased, and the US Dollar was firm. In fact, nearly all indices and other assets tracked by EMC were higher on the week as we close out the first quarter.
I am using a different format this week since it is end of quarter, providing performance data for the first quarter of this year, and how this performance compares to the first quarter of prior years.
MARKETS IN 1Q2023
Keep in mind as you are reviewing first quarter data for financial assets below that Friday was a holiday for stocks and bond markets in the US, the UK and Europe due to Good Friday, so Thursday was the close of the quarter.
Global equities killing it
Several of the equity indices tracked by EMC reached record levels in the first quarter, including the Nikkei 225 (Japan), the STOXX 600 (Europe) and the S&P 500 (US). The FTSE 100 flirted with its record high, too, not quite reaching it but nonetheless chalking up a gain of 2.8% in the quarter. All of the indices with the exception of the Nikkei 225 had their best first quarter performance since 2019. The Nikkei 225 had its best quarter in 1Q24 (+20.6%) in many years, delivering double the return of the next best-performing index (the S&P 500, +10.2%).
Earnings of many companies globally for the fourth quarter of 2023 – released during February and March – provided price support as the global economy continued to chug along at a pace that was better than expected. The most difficult corner of the world continues to be China, where equities managed to show modest gains even though the Chinese government (and PBC) have been unable to unlock a cocktail of measures to soothe investors’ concerns. Emerging markets stocks, heavily influenced by China’s weighting in the index, also suffered from the continued strength of the US Dollar, itself fuelled by a combination of relative out-performance of the US economy (and a more positive outlook), as well as the reality of a “higher for longer” mantra with respect to the Fed Funds rate vs expected policy rate reductions in the UK and Europe.
US equities remain strong – small caps lag
US equities registered solid gains in the first quarter, with more balanced performance than in 2023 when the rally was heavily concentrated in gains by the “Mag 7”. In FY2023, the S&P 500 total return index returned 26.3%, nearly double the return on the S&P 500 equal-weighted total return index (+13.9%). However, the gap of performance was substantially closer in the first quarter 2024, with the S&P 500 total return index gaining 10.6% and the equal-weighted index not far behind, at 7.9%, showing that the rally in US stocks had broadened considerably.
The one area of disappointment relatively speaking in US equities remains small caps, with the Russell 2000 continuing to lag the gains of the larger cap indices like the S&P 500 which delivered more than double the return of the Russell 2000 in the first quarter.
Bonds – US Treasuries continue to suffer, corporate credit slightly better
At the end of 2023, investors were anticipating that US Treasury yields would continue to decline throughout 2024, even though this was arguably at odds with the Fed’s Summary of Economic Projections. Economic data releases in January and February proved that investors’ assumptions were too aggressive. With inflation remaining sticky, it began to gradually sink in that the Fed Funds rate would remain “higher for longer” and that fewer reductions in the Fed Funds were likely in 2023. This realisation pushed US Treasury yields higher 30bps-40bps across the entire curve in the first quarter, with investors in intermediate- and longer-maturity USTs suffering losses after glimmers of hope had emerged in the fourth quarter. Also, the yield curve remained similarly inverted as it had at the end of the year.
As far as corporate bonds, credit spreads continued to grind tighter across the investment grade/non-investment grade quality curve, showing that investors had limited concerns about credit deterioration in the broader market. This is consistent with the “recession that never came”. Even though spreads continue to move tighter, bonds suffered from higher underlying yields. The high yield market delivered marginal positive total returns in the first quarter in both US$ and €, but the investment grade (BBB) market largely stood still (with tighter spreads offset by higher yields).
Other assets
The surprises as far as other assets in the first quarter have included gold hitting record highs, the Japanese Yen weakening below ¥150/US$1.00 (even though the BoJ pivoted), oil prices increasing strongly, and the US Dollar strengthening. Bitcoin also had an amazing 1Q2024, hitting record highs.
It will be interesting to see how April starts, in that the first quarter has ended strongly, while the end of the UK tax year (April 5) and the date that US tax payments are due (April 15) are both looming.
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