US equities investors enjoyed the best week of 2024, after having just experienced the worst week of the last few years. The S&P500 rose 4% and Nasdaq rallied 6%, after the 6% drop of last week. It still remains about 7% lower from its July peak. In Europe, the moves were much less exciting, with the main indices adding 1-2% on average, as consumer names and luxury stocks continue to be under the "Chinese spell". In terms of sectors, Technology managed a big comeback as Nvidia rallied back from its recent lows, boosting sentiment on other names as well. Energy was the only negative sector, as WTI crude oil prices approached 65$, the lowest in three years, only to rebound at the end of the week.
Rotation across sectors and styles was again violent, each having its day during this volatile week. If the last day of the week gives any reliable hint for what comes next, Small Caps rose by 2.5% and the cyclicals (Autos, Industrials and Materials) rallied back, after the initial slump. Investors were selling the defensive positions again (healthcare, staples, food) feeling more confident at the end of the week. But these moves can be reversed anytime and anyday, as market conviction is low. What is becoming more of a trend is Technology's undeperformance despite some days/weeks of reprieve. The Tech-heavy Nasdaq index remains much lower than its recent peak, as the broad S&P500 is just 1% away from another record.
Such volatility is neither necessarily bad nor extremely good. On the positive side, there are a lot of potential buyers who are eager to buy-the-dips and participate in the market. The biggest obstacle of a bull market is for participants to use rallies to sell into, as it is often the case in the tricky September-mid October period. But last week provided some optimism that sellers are "on strike" and the bears have been arrested. On the negative side, this kind of volatility is sometimes associated with short-term peaks in the markets, especially if the indices fail to break out to the upside. This is best described as "buyer fatigue". To this end, it would be crucial for the S&P500 to quickly break above 5670 and move closer to 5800, rather than start drifting lower again. The FED meeting on Wednesday could provide a catalyst in both directions.
As expected, the ECB cut the deposit rate by 25bps to 3.5%, for the second time this year. The most important takeaway from the statement and the press conference was that the ECB avoided a clear signal on the timing, pace and depth of future rate cuts. It also avoided a clear signal whether or not it would cut rates again at the next meeting on 17th October. President Lagarde indicated that the ECB expected a relatively low inflation number for September, but that subsequent inflation rates would be higher again. She said that "data dependence" does not mean "data-point dependence" and that a single data point (low September inflation) would not determine the ECB's policy decision. This, combined with the fact that the ECB will not get a lot of new data between now and the October meeting, suggests that the ECB will not cut in October. We again remind the case of Sweden, where the economy collapsed into recession as the central bank was very reluctant to cut rates at the beginning of this year. It is very likely that the ECB will be forced to cut more agressively, in the next 6-9 months.
The FED meeting on Wednesday will be even more interesting. To begin with, the central bank is going to cut rates for the first time in many years, as confirmed not only by the minutes of the previous meeting but also by the Chairman himself with his very recent Jackson Hole speech. Usually, interest rate moves take the shape of 25bps, with anything above that indicating some sort of urgency. The FED made 50bp and 75bp moves when it was combatting the 2001-2003 bear market or the 2008 financial meltdown and the 2020 pandemic. Yet again, with no clear signs of a severe economic slowdown in sight, some FED officials started discussing a 50bp rate cut last week, igniting again the debate of why would the FED want to move like that? Why would they want to send the signal of emergency, unless they have information that the rest of us do not, which we believe carries a minimal probability.
We have to take into account that interest rates are in restrictive area of almost 250bp above neutral rate. As such, the FED could "promote to the public" the 50bp rate cuts as a way to get sooner to the neutral rate, rather than a panic reaction. For financial markets, a 25bp rate will be confirmation of the recent rally but we cannot exclude an initial "buy the rumort-sell the fact" reaction. A 50bp rate cut will complicate matters and it remains to see how the collective mind of markets finally reacts. A recession scare or willingness to go fast back to neutral rates to protect a slowing economy ? As we already said, the outcome is anybody's guess and we will refrain from making forecasts. We stick to the principles of diversified portfolios across sectors and regions, with long duration bonds playing an important role, for most scenarios.
US August inflation provided again a mixed picture, but with optimistic details. The headline CPI inflation dropped from 2.9% in July to 2.5, which is the lowest level since February 2021, just before the start of the inflation surge. Prices for food and energy are both now running at or below their pre-pandemic pace. Overall, core consumer goods prices declined for the 14th time in 15 months, falling 17bp in August. However, core CPI rose 28bp in August and +3.2% on a yearly basis, primarily because of consumer services inflation. But the big surprise this month was in owners’ equivalent rent (OER) , which after the two smallest increases in nearly three years in June and July, the 50bp increase in August was one of the strongest increases over the past year.
Bond yields remained close to the recent lows, as investors keep buying any dip (in prices and any spike in yields). Admittedly, yields are now quite low and they discount a long series of rate cuts both by the ECB and the FED. But this is normal, as we have exited both the rate hikes period and the "higher for longer" period, which means that it will be very difficult and surprising for yields to return anywhere close to their recent highs. The return of the negative correlation between bonds and equities, as shown in the July-August episode is also another reason why investors are buying duration again.
Chart of the Week : The case for zero inflation in 2025 is not a wild scenario.
When inflation was at 10% on both sides of the Atlantic, we expressed the view that due to the "base effect", inflation will have to slow down significantly in the following 12 months (ie comparing prices to already high prices). This proved to be correct. We now see the scenario of inflation falling back to zero or even negative (temporarily) in the next 12 months as statistically meaningful. It will only take the services (restaurants, hotels, travel, insurance) prices to remain at today's high levels (not fall) and other things being equal the "miracle" will happen, in a pure mathematical way. The above table shows some of the details of the recent inflation report in the US. First we see that some large categories of consumer goods are showing already very small or negative inflation (clothing, used and new cars for example). But the big issue is the Services and Rents which continue to grow at 5% annual rate (highlighted in yellow). Hence, the question is : in one year from now, will landlords, hotels, airlines, restaurants, insurance companies be able to hike another 5% on today's prices ? Because if they hike much less or, even better, leave them almost unchanged at current (high) levels, then inflation might start showing 0% increase on ayear-over-year basis. This could be one of 2025's biggest "surprises".
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week : BLS, photo:
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