Insights

Weekly Market Update

Our Asset Allocation team comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

FOREWORD

  • Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.

From the desk of Our Asset Allocation team, Friday 16th February 2024.

US exceptionalism revisited

Economic activity in the world, ex-US, has been uninspiring. We learned that both the UK and Japan were in technical recession in the second half of 2023 after both countries released GDP prints for Q4, 2023 that were below expectations. The UK contracted at an annualised pace of 1.4% in Q4, 2023 as measured by the quarter over quarter, seasonally-adjusted annual rate (qoq, saar) after a pace of -0.5% annualised in third quarter of last year. Japan contracted at -0.4% (qoq saar) annualised in Q4 after -3.3% in Q3, 2023 and it lost its spot of third largest global economy to Germany as a result.

Europe is not faring much better: while it avoided a technical recession in the second half of last year, the European Commission revised down its 2024 growth forecast for the eurozone to a paltry +0.8%, down from a prior forecast of 1.2%, and therefore barely accelerating from the pace of 2023 of 0.5%. Australia is also showing signs of strains, but in the labour market, with an unemployment rate that reached a two-year high of 4.1% versus 3.9% prior.

When looking at earnings from companies, the picture is in line with these paltry indicators of growth. With around half having reported in Europe, companies are not really producing positive surprises, and earnings growth for the Eurostoxx 600 looks to be a low single digit of around 2% for now but could fall even lower as the season evolves.

Meanwhile, the US earnings vintage continues to produce a hefty rate of beats, with well in excess of 70% of the reporting companies coming in at 7.5% above consensus expectations for the S&P500. This should result in an overall earnings per share (EPS) growth in the high single digits around +7%-8% year over year (yoy). But looking a little closer, that figure is the average of a rather lop-sided club: the Magnificent 7 will likely produce earnings growth of around 70% while the 493 other companies are likely to publish a negative number of circa -3%yoy! So it could be that American companies are not that much different after all: excluding the 7, they are certainly facing similar difficulties to their European counterparts.

On the economy front, data for the United States could be suffering from one-off January effects and still turbulent seasonal adjustments from the pandemic. One data point certainly doesn’t make a trend but there were confusing data prints pointing to a significant deceleration of consumption (-0.8% month over month), while inflation could be sticky indeed (+0.85% mom for the super core – the highest since April 2022, accelerating to 4.3%yoy from 3.9% prior). This is a headache for the Fed. Front-end rates have therefore been aggressively on the move lately, now only pricing 90 basis points (bps) of rate cuts by the Fed in 2024, starting around June/July, versus 150bps of cuts starting from March just a few weeks ago.

The only central bank that can claim victory these days is the Swiss National Bank as its January CPI came in at +1.3%yoy against expectations at 1.7%, while core inflation is down at 1.2%yoy. Nevertheless, the Bank of England was also handed a nice surprise with the January CPI coming in at -0.6%mom against expectations of -0.3%mom, and core a smidge lower at 5.1%yoy versus 5.2% expected.

The US economy remains exceptional in its resilience. The Atlanta Fed GDPNow print might have been revised lower to 2.86% versus 3.42% for Q1, 2024 but there could be signs of re convergence on growth (lower) and inflation (higher). Moreover, companies’ earnings are not that different when excluding the Magnificent 7. The central bank race of which will cut first remains wide open!

Geraldine

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Data as of 16th February 2024 unless otherwise stated.

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