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Paradigm shift

market snapshot

26 April 2024 |
Stronger-than-forecast US economic reads and hawkish comments from the US Federal Reserve have brought rate-cut hopes crashing to earth.

Fast reading

  • US Federal Reserve’s meeting on 6-7 November now forecast as the first likely opportunity to cut rates. Previous forecasts were for September.
  • The US annualised first-quarter growth rate came in at 1.6%, well below analyst expectations of 2.5%.
  • Inflation data for the US also came in higher than expected, making it less likely that the US central bank will begin to lower interest rates by the third quarter.

Markets faltered this week on the back of worse-than-forecast inflation and growth figures from the US. Investors took this as the cue to curb their expectations of an early reduction in interest rates and both equities and bonds stalled in response.

The S&P 500 and the Dow Jones finished the week back where they began after initial declines, while the yield on benchmark 10-year US Treasuries gained 6 basis points to 4.7% by week’s close.1 

Early results from this quarter’s earning season complicated the picture, with some key technology names offering disappointing results, witnessing significant share price declines or being downgraded by analysts. 

There’s a Wall Street chestnut that one surprisingly aberrant data point is a blip, two are a fluke but three in a row start a new trend

Phillip Orlando, Chief Equity Market Strategist at Federated Hermes, notes that inflation data is the main spanner in the works for investors banking on early rate cuts.

“There’s a Wall Street chestnut that one surprisingly aberrant data point is a blip, two are a fluke but three in a row start a new trend,” he says. “The decline in inflation, once thought to be on a glide path to the Federal Reserve’s 2% target last year, has stalled over the past few months and seems to be re-accelerating.

“Once, the consensus view was that the US economy was heading into recession at the end of 2023. But the labour market has been strong and forecasts of a hard landing have disappeared. The current debate is whether the economy will have a soft landing or no landing at all. Fed officials, who assured us just last month to expect three interest rate cuts this year, are now furiously back peddling, with some warning their next policy decision may be to hike rates.”

Figure 1: US macro – expectations vs. reality

The US prospect of higher-for-longer rates also affected Japan where the yen hit a muti-decade low versus the dollar.

Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited, says the Bank of Japan (BoJ) is reluctant to change monetary policy following March’s rate hike but also highlights the potential for supportive measures for the yen.

“Most likely we’ll see some changes in language suggesting flexibility around future bond buying; with inflation forecasts getting revised higher and growth forecasts revised lower,” she says. “BoJ Governor Kazuo Ueda’s forward-looking commentary will also be closely watched as it relates to future hikes and balance sheet policy.”

Figure 2: A 38-year roundtrip (JPY/US$ since 1986)

The emerging markets view

For James Cook, Investment Director, Emerging Markets at Federated Hermes Limited, the apparent loss of momentum in developed markets shines a light on opportunities elsewhere.

Here, he points to a loosening of monetary policy in several countries in Latin America, positive structural economic drivers in India, Indonesia and Mexico and a new technology cycle boosting companies in Taiwan and South Korea.

“Despite ongoing volatility in emerging equities and China’s economic woes, we can point to relatively favourable macroeconomic and monetary policy outlooks in many parts of the emerging market world, not least of which is China’s economic overhaul, which is improving its prospects,” he says.

“We continue to prioritise investments in high quality businesses that have the capacity to grow structurally, maintain low levels of leverage and trade at reasonable valuations. We believe such firms are well placed to outperform in a world that may experience higher-for-longer interest rates, slower growth and more geopolitical uncertainty.”

For further insights on global equities please see: Sustainable Global Equity, 2023

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