This week in the markets: the UK is in focus in a holiday shortened week; slower job creation, rekindling hopes for a US interest rate cut; and the strong dollar starts to bite.
We’re now a third of the way through 2024 and the market performance tables for the first four months of the year are showing a clear divergence between risk assets like shares and defensive assets like bonds.
Shares have started the year well, despite coming off the top during April. The S&P 500 is up nearly 6% year to date, with Japan and Europe not far behind. Look beneath the surface, though and the story is all about size. Large shares continue to lead the way with both growth and value versions of the mega caps outperforming smaller companies, which are modestly down year to date.
Small caps are still doing better than the most interest rate sensitive parts of the market, however. The worst performers year to date are government bonds, inflation linked bonds and REITs as the monetary policy pivot continues to be pushed further back in 2024 and maybe even into 2025.
But shares are not right at the top of the leaderboard. Bitcoin remains the top performer so far in 2024 as it has been for most of the past decade. And gold is up there again as its safe haven characteristics have made it attractive to investors worried about geo-political uncertainty and persistent inflation.
Investors may be concerned about the timing of the first interest rate cut but they got some good news on that front at the end of last week as the US jobs market grew less quickly than expected in April, adding just 175,000 new jobs, compared with forecasts of around 240,000. It was the smallest rise in jobs for six months as the labour market starts to cool in the world’s biggest economy.
The jobs numbers came in the same week that the Fed had indicated that interest rates would stay at a 23 year high of between 5.25% and 5.5% for longer than the market has been pricing. The futures markets, which had been looking for six quarter point rate cuts at the start of the year are now predicting only one or two.
In line with the slowing jobs market, the US unemployment rate rose slightly to 3.9%, above the forecast of 3.8% although still low by historic standards. That the jobs market is slowing and unemployment edging higher is not surprising given the rapid rise in interest rates over the past couple of years. What is more surprising is that tighter policy has taken so long to have an impact.
The big fear for investors in recent weeks has been that the Fed might actually raise interest rates from their current level in order combat inflation which is proving stubbornly resistant to returning to the Fed’s 2% target. So, the latest jobs data are probably the Goldilocks scenario - a still robust economic recovery but without the need for any further monetary squeeze.
Unsurprisingly that was taken well by stock market investors and at 5,180 the S&P 500 is back within a whisker of the high it reached in March. Over one year, the US benchmark is up 25%. The bull market that has seen shares rise by nearly 50% since the October 2022 low appears to be still intact.
In a shortened week, curtailed by the May Day holiday in many countries, the focus is actually on the UK which has a string of economic announcements and a Bank of England rate-setting decision for investors to digest.
First up on the economic front are today’s house price numbers from the Halifax. These show a stagnation in house prices with a rise of just 0.1% as the impact of higher mortgage rates starts to bite. A string of big lenders has raised rates in the past few weeks as the swaps markets on which mortgages are based begin to reflect the likelihood of a slower fall in interest rates than had been hoped.
The increase in the cost of fixed rate mortgages from the pandemic lows continues to affect growing numbers of borrowers as their deals come to an end and they are forced to refinance at much higher rates. This naturally has a broader economic impact that will probably be apparent on Friday when the latest GDP figures are unveiled.
Before that happens the Bank of England will have lifted the lid on its latest thinking with Thursday’s interest rate announcement. No change is expected but markets now think that a cut is more likely here and in the rest of Europe before the Fed makes a move across the Atlantic.
That is starting to be reflected in the currency markets where the dollar is riding high as investors look to cash in on the US’s more attractive yields. The pound has fallen from a high of over $1.30 to today’s $1.25.
That has helped the FTSE 100 rise to a new all-time high of nearly 8,300 thanks to the high proportion of dollar earnings for the constituents of the UK benchmark index. Dollar earnings are worth more on translation back into our domestic currency when sterling is weaker.
The fall in the value of the pound is nothing like as dramatic as what has been seen in Japan, however. There the Bank of Japan’s insistence on keeping interest rates close to zero has pushed the yen down to a 34 year low of around 160 yen to the dollar.
While that is good for some Japanese companies, for the same reason that the FTSE 100 has benefited, it is starting to squeeze Japanese consumers who are finding imported goods increasingly expensive and giving up on overseas holidays to places like Hawaii, which is becoming impossibly expensive for ordinary tourists.
Such is the concern in Tokyo that last week saw some interventions by the Japanese authorities, selling dollar assets like Treasury bonds to boost the value of the yen.
Turning back to the stock market, attention continues to be focused on the outlook for corporate earnings, which in the US remain strong. The year on year growth rate has improved during the course of the ongoing earnings season from 1% to 7%. Around 400 of the US’s leading companies have now reported first quarter profits, and about 80% of these have been expectations by a comfortable margin of nearly 9%.
That’s helping to keep full year expectations up at a 9% growth rate, supported by rising revenues. Dividends are up too, helping to support the stock market close to its recent high.
So the consensus is still that the US is pulling off a soft landing, overcoming inflation without the need to push the economy into recession. And that in turn is supporting the stock market, which has enjoyed a relatively modest cyclical bull market by historic standards. It is still shorter than the average and has not run as far in terms of percentage gain. The glass remains half full for investors.
