S&P 500 Breaks 5,000 Amid Mixed Economic Signals and Rate Cut Speculations
It was an up and down week for markets after a strong finish the prior week. Markets ended slightly up but the Fed pushed back on imminent rate cuts, putting some pressure on markets. However, positive earnings results overcame that and the US market hit new highs.
In global markets, U.S. equities continued their upward trajectory, with the S&P 500 finally crossing the 5,000 level in mid-February. This was driven in part by strong quarterly earnings reports from major U.S. companies like Ford and Intel that beat expectations. However, there were also concerns around regional banks and commercial real estate loans that caused some jitters.
Bond yields rose over this period, with the U.S. 10-year Treasury yield going from around 4% to 4.18% in a week in mid-February on expectations of higher interest rates for longer. Oil prices also edged up with Brent crude back above $80 per barrel amid geopolitical tensions like the conflict affecting shipping through the Red Sea.
Various Fed speakers reiterated that interest rate cuts are unlikely in the near future until inflation is clearly on a sustainable downward path back to the 2% target. Market pricing shows expectations of rate cuts later in 2024.
In Europe, data indicates continued economic weakness, especially in Germany, though inflation is slowing. The UK market was weighed down by commodity weakness and a weak earnings report from AstraZeneca.
In China, authorities took steps to prop up equities like banning short-selling and buying stocks and ETFs, driving a rebound after huge declines. There are questions around how much they can actually do compared to during the Global Financial Crisis.
In Japan, despite midweek declines, positive earnings from Toyota and Honda on Friday drove gains as their hybrid-focused strategy seems to be working while Tesla struggled.
The Australian Market
In Australia, the earnings season started with a few decent results, though some guidance has people nervous. Companies like AGL kicked off well but JB HiFi this week will give a better read on the consumer economy.
The RBA held rates steady this month with a mild tightening bias still in place. It noted high services inflation and showed a low probability of cuts in the first half of 2024 as it wants clear confidence of reaching its inflation target.
The RBA's revised quarterly forecasts show trimmed mean inflation dipping to 2.8% by end-2024 and reaching the 2-3% target range in 2025-26. Market pricing expects rate cuts later this year. There is some discussion from analysts and central banks that neutral interest rates are now higher than pre-pandemic, adding to the case for patience and less aggressive easing.
Overall a decent week with markets up around 1% despite the theme of higher for longer rates, especially in Australia. Key things to watch next week include the Australian earnings season continuing, the US CPI print on Tuesday, and manufacturing data on Thursday.