Investors Reassess Rate Path Outlook, U.S. and Global Markets Trade Sideways

Barry Adams
05 Feb, 2024
New York City

Market indexes remained depressed in Monday's trading, and Treasury yields spiked on the rate-path worries.

Federal Chair Jerome Powell reiterated the need to keep interest rates higher until policymakers are more confident about the sustainable downward path of inflation.

"We want to see more evidence that inflation is moving down to 2%" and "our confidence is rising, before we take that important step of cutting interest rates," said Powell during an interview with the CBS 60 Minutes show aired on Sunday.

"It is not likely that this committee will reach that level of confidence in March" to cut the interest rate at the next policy meeting.

However, Powell also stressed that the committee is ready to cut interest rates later in the year without giving a specific timetable, size, or number of rate cuts.

At the end of the last policy meeting in 2023, investors had factored in four to six cuts totaling as much as 1.5%, but that calculation is likely to be proven to be too optimistic.

Powell also clarified that while inflation is likely to slow down to the central bank's target rate of 2%, price levels are not expected to decline.

"We do not expect to see a decline in overall price level; that does not happen in economies except in very negative circumstances," said Powell, indicating that higher prices for automobiles, homes, and other goods and services are here to stay.

All the Fed can expect is that these prices are rising at a slower pace of 2%, not faster.

The U.S. economy added 5 million jobs over the last two years when interest rates were raised 11 times from zero to 5.50%, proving most economists wrong who were forecasting an economic slowdown or a recession.

While inflation has been slowing down over the last nine months, the slowdown is largely because of the decline in energy prices and the easing of supply chain disruptions; neither of these two forces is impacted by the Fed's policy.

Powell's comments added to market anxieties after the non-farm payroll expanded at a faster pace in January and wage gains were ahead of inflation over the last twelve months, stoking fears of a rebound in inflation.

On the earnings front, investors reviewed the latest earnings from McDonald's, and about 400 leading companies are scheduled to release their quarterly results this week.

 

U.S. Indexes and Yields

The S&P 500 index increased 0.5% to 4,958.27, and the Nasdaq Composite rose 1.1% to 15,462.68.

The yield on 2-year Treasury notes increased to 4.45%. 10-year Treasury notes declined to 4.10%, and 30-year Treasury bonds edged down to 4.29%.

WTI crude oil increased $0.18 to $72.08 a barrel, and natural gas prices decreased 2 cents to $2.05 a thermal unit.

Gold decreased by $15.19 to $2,023.21 an ounce and extended the previous week's gains after the U.S. dollar drifted slightly lower in international trading.

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 104.30.

 

U.S. Stock Movers

Elanco Animal Health soared 8% to $16.0 after the company agreed to sell its aqua business for $1.3 billion to Merck's animal health division.

Elanco plans to use most of the proceeds to pay down its debt and lower it by 20%.

Catalent jumped 9.9% to $59.90 after the healthcare company agreed to be acquired by Novo Holdings for $63.50 a share in cash. 

McDonald's decreased 0.6% to $295.0 after the fast food restaurant chain reported weaker-than-expected quarterly results.

Net sales in the fourth quarter increased 8% to $6.41 billion, net income rose to $2.04 billion from $1.9 billion, and diluted earnings per share advanced to $2.80 from $2.59 a year ago.

Global same-store sales rose 3.4%, driven by a 4.3% increase in U.S. domestic sales, but comparable sales lagged in the Middle East to 0.7%, weighed by the Israel-Hamas conflict.

The company said it plans to spend between $2.5 billion and $2.7 billion in capital expenditure and allocate more than half of its spending to open 2,100 new stores in the U.S. and international markets in 2024.

 

Week Ahead

This week, world investors are looking ahead to the release of earnings from major U.S.-listed corporations, including Alibaba, ARM Holdings, Caterpillar, Eli Lilly, Ford Motor, PayPal, PepsiCo, and Uber.

In Europe, investors are looking ahead to the release of Germany’s factory orders and the final reading on inflation.

Across the Pacific, China is expected to release its inflation and current account data for the fourth quarter.

In addition, the central banks of India, the Philippines, and Australia are expected to keep rates unrevised.

 

European Markets Traded Near Recent Highs

European markets trended lower in Monday's trading, and investors reviewed the latest update on the eurozone service sector and German international trade data.

The service sector in the eurozone showed a slight decrease, and the PMI index eased to 48.4 in January from 48.8 in December, according to the data released by S&P Global on Monday.

In other economic news in the region, the service sector in Italy expanded for the sixth month in a row and in Spain for the fifth month in a row in January.

Crude oil traded volatile after the price of the commodity was under pressure following the rise in the dollar and ongoing demand growth worries in China.

 

German Trade Surplus Expands in December

Germany's exports and imports declined in December, but trade surplus rose for the fourth month in a row, the Federal Statistics Office, or Destatis, reported Monday.

Seasonally adjusted exports declined 4.6% from the previous month to €125.3 billion in December, and imports fell 6.7% to €103.1 billion.

From a year ago, exports fell 4.6% and imports dropped 12.4%, reflecting a weakness in non-EU demand and a sharp fall in energy import prices.

In the year 2023, exports decreased 1.4% to €1.56 trillion and imports plunged 9.7% to €1.35 trillion, resulting in a trade surplus of €209.6 billion.

In December, exports to the EU-member nations fell 5.5% to €67.5 billion and to the non-EU nations decreased 3.5% to €57.8 billion.

The shipments to the U.S. led all other nations and declined by 5.5% in December to €12.7 billion, followed by a decline of 7.9% to €7.5 billion to China and a fall of 4.3% to €7.4 billion to the U.K.

Imports from the People's Republic of China led all incoming goods arrivals and declined 8.5% to €11.6 billion, followed by a 1.9% decline to €8.2 billion from the U.S. and a fall of 10% to €2.6 billion from the U.K.

 

Europe Indexes and Yields

The DAX index decreased 0.1% to 16,898.04, the CAC-40 index fell 0.1% to 7,583.23, and the FTSE 100 index inched higher by 0.1% to 7,606.92.

The yield on 10-year German bonds edged up to 2.28%; French bonds inched higher to 2.78%; the UK gilts edged lower to 3.98%; and Italian bonds inched lower to 3.84%.

The euro edged lower to $1.075, the British pound inched higher to $1.260, and the U.S. dollar gained to 87.0 Swiss cents.

Brent crude decreased $0.09 to $77.42 a barrel, and the Dutch TTF natural gas decreased by €1.04 to €28.09 per MWh.

 

Europe Stock Movers

UniCredit SpA soared 10% to €29.36 after the largest Italian bank reported higher-than-expected profit and announced its plan to increase shareholder payout.

CMC Markets PLC soared 15% to 152.84 pence after the online trading platform announced its plan to cut 200 jobs to reduce its overall operating costs.

Vodafone Group fell 0.5% to 68.25 pence, despite the wireless telecom operator reporting higher-than-expected sales in the fiscal third quarter.

Societe Generale declined 0.6% to €22.97 after the French lender announced organization changes at its headquarters that would lead to 900 voluntary departures.

 

Caution Prevailed In Asia Trading, Yen Extended Recent Losses 

Market indexes in Tokyo, China, and India edged higher in volatile trading, but the indexes in Seoul and Sydney fell.

Global market sentiment was cautious in Monday's trading after the U.S. dollar perked up, crude oil prices fell, and tensions in the Middle East stayed elevated.

In addition, rate-cut expectations were also dashed after the U.S. economy added 353,000 jobs in January, surpassing expectations by a wide margin.

Federal Reserve Chairman Powell confirmed in an interview on Sunday that policymakers may wait after the next meeting in March to cut interest rates.

The U.S. dollar index jumped to an 8-week high against the basket of currencies after comments from Powell suggested that rates are likely to stay higher longer than expected.

Crude oil dropped 0.5% before recovering in late afternoon trading across Asia after the U.S. dollar rebounded and China's regulatory announcement fell short of market expectations.

On the economic front, Australia's December exports increased 1.8% to A$47.1 billion, imports rose 4.8% to A$36.2 billion, resulting in a trade surplus of A$10.95 billion, the Australian Bureau of Statistics reported Monday.  

 

Nikkei Extended Gains on Yen Weakness and Positive Earnings

The Nikkei 225 average jumped 0.6% to 36,373.16 and inched closer to the high of the year so far, and the KOSPI index fell 0.6% to 2,598.68.

Export-sensitive stocks advanced after the Japanese yen fell sharply following the strength in the U.S. dollar.

Canon, Panasonic, Seiko Epson, and Fujitsu advanced between 2% and 7%.

Isetan Mitsukoshi soared 6.5% to ¥1,933.50 after the retailer reported better-than-expected financial results, increased its interim dividend, and announced a stock buyback.

 

China Stocks Rebound In Volatile Trading

Market indexes in China dropped in early trading following comments from Chairman Powell and a lack of specific stimulus from the government.

Stocks in afternoon trading erased morning losses after the China Regulatory Commission pledged to stabilize financial markets and crack down on market speculators in a statement released on Sunday.

But the regulatory agency fell short of announcing concrete steps in the near future.

The CSI 300 index advanced 1.2% to 3,184.64, and the Hang Seng index rebounded 0.3% to 3,184.64.

The Hang Seng index extended its 2024 loss to 9%, the worst-performing index among the leading markets around the world.

Small-cap stock indexes on the mainland China dropped around 5% after the unwinding of structured products linked to small capitalization stocks triggered the sale of underlying securities.

Baidu, Tencent, Alibaba Group, and JD.com traded volatile and fell as low as 2% before rebounding to a 1.0% gain.

Property developers also lacked direction and traded volatile.

Longfor Group, China Overseas Land and Development, Country Garden, and Sun Hung Kai Properties traded between a decline of 3% and a gain of 1.2%.

 

India Indexes Turned Lower Ahead of Rate Decision

Stocks in Mumbai opened lower amid weak markets in Asia and ahead of rate decisions from the RBI later in the week.

The Reserve Bank of India is expected to hold its key lending rates steady for the sixth time in a row on Thursday.

The central bank is widely anticipated to hold rates, tracking the rate decisions made by the U.S., UK, and Euro Area.

The Sensex index decreased 50.06 points to 72,035.57, and the Nifty index gained 5.90 points to 21,859.70.

The State Bank of India declined 1.1% to ₹642.65 after the largest lender in the country reported a decline in net profit in the latest quarter.

Net profit in the December quarter plunged 35.5% to ₹9,164 crore from ₹14,205 crore a year ago after the bank set aside ₹7,100 crore for its pension liabilities.

Tata Motors gained 6.5% to ₹936.50 after the Jaguar and Land Rover maker reported a surge in its latest quarter profit.

Consolidated profit in the December quarter soared 137.5% to ₹7,025 crore from a year ago.