Market Activity


It turns out two weeks is a long time in the world of central banks

Market Activity

It turns out two weeks is a long time in the world of central banks

Your midweek market update

April 17, 2024

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Traders rushed to trim wagers on the extent of interest rate cuts by the Bank of England this year after UK inflation slowed less than expected.

Traders moved to fully price one quarter-point reduction by November and as little as a 30% chance of a second cut following the data. That later pared, making a second cut a coin toss at around 50/50.

The figure was slightly higher than the 3.1 per cent forecast by economists polled by Reuters and the Bank of England and above the BoE’s 2 per cent target, but the lowest since 2021.

We strongly believe that this time next month when the April data is released, the yearly inflation figure will be between 2.4 and 2.7% which is well on it’s way to the target. However, the problem we will have soon after that is the increase in oil prices. If they don’t drop, the current trajectory may well pivot, and that will be a devastating blow.

The March data was driven by a fall in food prices, clothing and household goods. It was also lower than the rate of price growth in the US for the first time since March 2022. 

Core inflation, which strips out volatile energy and food prices, declined to 4.2 per cent in March from 4.5 per cent in February. Analysts had expected a decline to 4.1 per cent. Services inflation, which is closely watched by policymakers, dipped from 6.1 per cent to 6 per cent.

It’s a setback for gilt markets, which have sold off over recent weeks as sticky US inflation cast doubts over the speed and extent of rate cuts from the Federal Reserve and central banks globally. UK bonds fell in early trading, sending the policy-sensitive two-year yield up four basis points to 4.53%, the highest since late February.

“The rate-cutting BOE bus will be delayed,” said Hank Calenti, senior fixed income strategist at SMBC Nikko Capital Markets. “There is an expectations management issue here – Bailey was warning that headline inflation would bounce off 2% soon, but it’s services inflation which is driving the bus and this is still way too high.”

Earlier this month Federal Reserve Chairman Jerome Powell confidently said that recent strong economic data had not altered the overall picture of inflation moving down toward the 2% target.

But it seems that has also now changed as Powell bemoaned the lack of further progress in the Fed’s inflation battle this year in a speech Tuesday. If higher inflation persists, rates will stay higher for longer, he suggested.

Powell acknowledged that progress had stalled this year, and said recent data have validated the wait-and-see approach to rate cuts. He added it was appropriate to allow the current policy to work. Futures traders now put the highest probability of a first cut coming in September, according to the CME FedWatch tool.

The market is now pricing in September for the first rate cut, with the probability of a June cut at just 14%, according to CME’s FedWatch tool.

In between those two Powell speeches, there hasn’t been a huge amount of data, one consumer price index reading, a producer price index print, a jobs report, and a retail sales update. It underscores just how quickly things can change.

The stock market was remarkably sanguine following Powell’s remarks given the circumstances, and the Dow even closed higher for the day. Maybe the market saw it coming, or maybe the market has simply stopped caring and listening.

Arguably the timing of rate cuts doesn’t matter, but more the fact that they are coming, eventually. It certainly doesn’t seem to impact the heavily weighted stocks, such as Microsoft, Alphabet and Nvidia. The S&P 500 equal-weight index fell 0.5% Tuesday, compared with the S&P 500’s 0.2% drop; 346 of the stocks listed on the index closed lower.

Stronger-than-expected first-quarter inflation and labour market data have continually led the market to reduce rate cut expectations. Chairman Powell pointed out that it would take longer than expected to gain confidence that inflation is moving toward its 2% goal.

A positive note


On a more positive note, The International Monetary Fund raised its global economic growth forecast by 0.1 percentage point from its outlook in January to 3.2% this year and next. The gain is mainly because of the strength in the US, but by 2030, the global economy could be growing at 2.8%, it said.

IMF Chief Economist Pierre-Olivier Gourinchas said there is still time to reverse course on challenges to global growth and cooperation, including geo economic fragmentation, rising trade restrictions, and increased use of industrial policy as nations including the U.S. and China re-evaluate their relationships.

Executives from the six largest US banks said the country's economy remains strong, consumers and businesses are still spending and borrowing, wealth management revenue has increased, and credit-card income and transaction volumes grew.

However, JPMorgan CEO Jamie Dimon noted signs of distress in loans to consumers with low credit scores. The higher rates for longer will eventually have an impact on the consumer. Credit will dry up gradually and the economy will slow… probably.

Earnings season is underway so here are a few updates:

Adidas: The sportswear giant is up by 7.5% in Germany to the highest in two years after upgrading its profit forecast, with analysts noting good sales growth across its product range.

LVMH: The luxury goods giant is up by 5% after its quarterly sales slowed less than anticipated, indicating a soft landing ahead for the industry.

Continental: The tyres and auto parts maker is down by 5% as it said its sales and margins are being squeezed by weakness in the European car market.

Just Eat Takeaway: The food delivery firm is down more than 5% after its quarterly update showed a fall in orders, signalling ongoing weak demand.

ASML Holding: the semiconductor manufacturing equipment supplier that is Europe’s third biggest company by market value missed expectations for orders in the first quarter. Net bookings in the first quarter of the year came to3.61 billion euros. Analysts had forecast orders of nearly €5.10 billion, according to consensus estimates by Visible Alpha, an investment research platform.

Shares were down 4.60% on the day at lunchtime Wednesday.

Rolls-Royce and plane maker Airbus are close to a $20 billion deal to produce aircraft components for Turkish Airlines.

Rolls-Royce shares bounced a little on the news and are up by around 1.5%. Over the past 12 months, its shares are up 167%.

In summary

One thing is for certain and that is that there is a great deal of uncertainty out there in the markets at the moment. Banks want you to buy, and many are crying ‘buy the dip’ but that is merely a legal way to try and drive the price of stocks up. They are all long and they make money when it does. They are terrified of the potential drop.

The geopolitical tensions are increasing, and there seems right now to be no way out. Our traders on TPP are being cautious at this time. Our long flats are predominantly flat and most of our active strategies have been short for a while. This is a trade that can take time. There are so many things that could go wrong in the world right now, it does feel that down is more likely than up to us.

This is a period where TPP can offer something that very few wealth managers can. Active trading strategies that aim to work in a volatile climate. Over time stocks indices have increased in value, but that doesn’t mean they will over the next 12 months. It’s key to diversify, and that’s where we stand out.

 It feels like the world is currently playing a giant game of Jenga; one wrong move and it might all come crashing down. With any luck, the political landscape can be navigated, but it won’t be easy, or imminent.

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