César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Two remarkable things happened last week: Taylor Swift touched down after a whirlwind trip from Tokyo just in time to see her boyfriend’s team win the Super Bowl and, with a total return of 1.4% i in USD, the S&P 500 hit the 5,000 mark for the first time in its history. With little new economic data, the index’s gains came, as before, on the back of a narrow group of mega-cap tech-related companies, whose generally upbeat Q4 earnings reports offset reduced expectations for early rate cuts from the Fed. Indexes outside the US did well, with Japan’s Topix index ii reaching a 34-year high thanks to a weak yen and a run of strong corporate results. Things also started to look up for Chinese equities, with the MSCI China index gaining 2.9% iii (in USD) last week, with buyers back in response to further signals of official support.
Further intimations from the Fed that a March rate cut was off the table and ISM data showing a strong rebound in services activity pushed US Treasury yields higher last week. European governments bonds also suffered in reaction to hefty recent bond issuance as well as pushbacks from ECB hawks against the idea of early rate cuts. The US dollar continued to rise against other major currencies, including the defensive Swiss franc. Oil prices rose strongly on forecasts that US production would flatline this year as well as Middle East tensions.
GEOPOLITICS
Highlighting the economic impact of attacks on shipping in the Red Sea by Yemen’s Houthis, a shipping giant warned of an uncertain 2024 earnings outlook linked to the disruption and an oversupply of container vessels.
KEY DATA
ISM’s purchasing managers index for the US non-manufacturing sector rose strongly to 53.4 in January from 50.5 in December.
German industrial production dropped by 1.6% in December on the previous month. This was the seventh straight month of decline. Industrial production in Germany declined by 3.0% in 2023 overall. Retail sales in the euro area dropped at a year-on-year (y-o-y) rate of 0.8% in December.
While China’s headline consumer price index (CPI) rose 0.3% on a monthly basis in January, the index fell at a y-o-y rate of 0.8%, the fourth consecutive month of y-o-y price declines. The Chinese purchasing price index declined by 2.5% y-o-y in January.
MARKETS VIEW
Consumption remains the main engine of the US economy, which will make this week’s data on CPI and retail sales important for assessing the health of consumers as well as the timing and magnitude of Fed rate cuts. Faster growth in the US than Europe is helping support the US dollar, which we expect to remain the strongest major currency in the first half.
With US equities discounting a Goldilocks scenario, valuations and concentration levels have reached new highs. We cannot exclude acontinuation of the recent rally, but areneutral global developed equities. We remain overweight gold, which is supported by geopolitical tensions. We have a neutral view on fixed income, as rate cuts are not imminent, and prefer investment-grade to noninvestment-grade corporate bonds.
