International Women’s Day 2024:

Deborah Cunningham, Chief Investment Officer for Global Liquidity at Federated Hermes

Federal Reserve Chair Jerome Powell has been talking himself hoarse lately. Ever since he failed to push back against the market’s overly ebullient expectations for rate cuts following the December policy meeting, he has told anyone who’d listen the Fed isn’t ready to declare victory over inflation.

In an appropriate twist for the data-dependent Fed, it was a series of economic reports that stemmed the tide. Robust GDP and employment figures, sticky wage, consumer and producer inflation, and respectable manufacturing and housing numbers did what the policymakers could not. In late December, futures contracts predicted upward of seven quarter-point cuts in 2024. Following the bump in month-over-month core PCE in January, they have priced in essentially three—in line with Fed projections. That’s why we—and really everyone—anticipates no rate action at the mid-March or early May policy-setting meetings and expect the first ease to come in June or July.

Market participants will surely raise their fists to the Fed again, and it is understandable. Powell and company were so behind the ball when they first tightened rates long after inflation had exploded. But the shift in sentiment, along with the pause itself, has benefited cash managers and investors. Across the liquidity industry, elevated yields and extended average maturities have created better relative value in our humble opinion.

Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited
After a very strong finish to 2023, rates markets have so far this year been recalibrating for a broadly stronger data set and less dovish central bank commentary. As ever, Gilts have underperformed against most peers, some of this is due to the large outperformance into the end of last year but there has also been lingering concern around the UK fiscal outlook overhanging the market.

With growing fiscal deficits and increased financing needs, Jeremy Hunt’s Spring Budget was being closely watched. Ultimately there were no surprises given most of it was leaked before Jeremy Hunt stood up, nor were there any surprises on the gilt remit which has been a positive for the market. Now the budget hurdle has passed smoothly, and central bank pricing looks less challenging, this should be a short term positive for the Gilt market. Looking a little further ahead there is a risk of more fiscal events during the run up to the UK general election and then again afterwards. This could weigh on the market in a relative sense as it will likely require more term premium.

Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes Limited
Share buybacks have been a topic of discussion this week for European and US companies. This demonstrates the confidence that businesses have in their outlooks for this year. With wage gains above inflation, the economic growth can keep going in the near term. The cooling labour market is not coming through yet.

With all the momentum for this year, increasingly there are those worried about what will take the fizz out of markets. Factor evidence suggests that even a slowdown in momentum does not lead to a selloff in the near term. So the rally continues despite the choppy outlooks. Positive results from Crowdstrike this week continued to bolster the constructive tech trade.

 
The UK budget led to a positive move for UK equities, though with inflation still high, the expectation for Bank of England cuts remains on the distant horizon and therefore we maintain some caution about the sustainability of the UK growth numbers.

Charlotte Daughtrey, Equity Investment Specialist at Federated Hermes Limited
In comparison to previous Super Tuesdays, this year’s results yielded few surprises and set up the 2024 US Presidential election to be a re-match of 2020. Whilst it is too early to call the outcome in November, this should be a relatively de-risked election campaign with both candidates having previously held the position as leader of the free world. Both candidates will want a strong economy which tends to be good for markets also. The US economy has continued to highlight its resiliency, the S&P 500 continues to reach new highs and the latest instalment of employment data (non-farm payrolls are due on Friday 8th march) suggests that the labour market is performing in line with the Fed’s hopes. In his address to Congress, Powell noted that it would “likely be appropriate to begin dialling back policy restraint at some point this year” which should provide comfort to the market. What did surprise the market this week was the decline in the US Dollar, highlighting that even with strong economic data volatility is ever present.

Nachu Chockalingam, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited
The general tone across credit markets remained broadly balanced this week and generic spreads are relatively unchanged for the most part. We have seen the primary market picking up in recent weeks, and most new deals are hovering around their reoffer price or a touch higher. However, the size of the new issue premiums we saw a few weeks ago seem to be gone, for now at least. What is particularly interesting is how bifurcated the high yield market feels at the moment. On one hand, we have many low beta tight-on-spread and sufficient-on-yield bonds. Whilst, on the other hand we are seeing a growing list of volatile and sensitive credit stories creating nerves across the market, yet the potential for opportunities in equal measure.

Kate Fowler, Associate Director – Policy & Advocacy at Federated Hermes Limited
We were pleased to see the UK Treasury announcing secondary legislation this week to develop a regulatory regime for ESG ratings providers, a measure we have been supportive of given the wide use of such ratings within the industry. This regulatory oversight should be focused on transparency, governance and management of conflicts of interest, rather than standardisation. Proportionality will be key to ensure there is not a significant barrier to entry for smaller, innovative providers. Mitigating potential harms arising from the use of ESG ratings will also require firms using such ratings to be cautious and take responsibility for understanding their methodologies and limitations.