Posted on by The Daily Shot Editor: Lev Borodovsky

The market is coming to terms with 3 Fed rate cuts this year

The Daily Shot: 23-Feb-24
• The United States
• Canada
• The United Kingdom
• The Eurozone
• Japan
• China
• Emerging Markets
• Cryptocurrency
• Commodities
• Energy
• Equities
• Credit
• Global Developments
• Food for Thought

 

The United States

1. The Fed is aligning market expectations with its own perspective of three rate cuts this year.
 

 
• The repricing in rate cut expectations this year has been substantial.
 

 
• Many economists remain concerned about a resurgence in inflation.
 
Source: BofA Global Research  

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2. The flash PMI report from S&P Global showed US factory activity picking up momentum this month.
 

 
– Factories are hiring again.
 

 
• However, service sector growth slowed.
 

 
– Fewer service firms are reporting rising costs.
 

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3. Existing home sales were roughly in line with 2023 levels in January.
 

 
• Inventories were slightly above last year’s levels.
 

 
• Sales prices hit a record high for this time of the year.
 

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4. Next, we have some updates on the labor market.
 
• Initial jobless claims hit a multi-year low last week, dipping below 200k.
 

 
Source: Reuters   Read full article  
 
– However, we don’t see the same sort of declines in continuing claims.
 

 
On a seasonally adjusted basis, the trends in the two indicators have diverged sharply.
 
h/t Eliza Winger; @TheTerminal, Bloomberg Finance L.P.  
 
• Morgan Stanley expects the unemployment rate to move higher next year as hiring slows.
 
Source: Morgan Stanley Research  

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5. Tariff hikes ahead?
 
Source: Gavekal Research  

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Canada

1. Canada’s retail sales jumped in December, but the advance estimate points to a pullback in January.
 

 
This chart shows the trend in real retail sales.
 
Source: StatCan  

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2. Canadian banks are increasingly using synthetic risk transfer transactions to reduce exposure.
 
Source: @markets   Read full article  

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The United Kingdom

1. UK manufacturing remained in contraction mode this month, with factories rapidly reducing their workforce.
 

 
• On the other hand, service sector firms enjoyed robust growth.
 

 
• The composite PMI showed improving business activity, with more firms boosting sales prices.
 

 
Source: Reuters   Read full article  
 
• Business outlook has improved markedly.
 

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2. UK consumer confidence unexpectedly worsened this month.
 

 
Source: @economics   Read full article  

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3. The housing market is exhibiting signs of recovery.
 
Source: @economistniraj, @TheTerminal, Bloomberg Finance L.P.   Read full article  

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The Eurozone

1. The STOXX 600 hit a record high, …
 

 
… as European shares surge.
 

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2. As we saw yesterday, the composite PMI is nearing stabilization.
 
Source: Reuters   Read full article  
 
– The manufacturing sector contraction worsened, dragged lower by Germany.
 

 
– But service sector activity stabilized, boosted by improvements in France.
 

 
• Gernmany’s factory contraction unexpectedly worsened this month. Manufacturers are rapidly cutting their workforce.
 

 
Source: Reuters   Read full article  
 
– Germany’s service sector slump eased with the resurgence of hiring.
 

 
• French manufacturing and services downturn is rapidly easing.
 

 

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3. According to a government report, French manufacturing sentiment is starting to recover.
 

 
• French retail sales continued their downward trend last month.
 

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4. Here are the contributions to the euro-area CPI.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Services inflation is expected to moderate.
 
Source: Pantheon Macroeconomics  

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5. The drawdown of inventories has detracted from economic growth.
 
Source: ECB  

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Japan

1. The Nikkei finally took out the 1989 peak.
 

 
2. Imports declined almost 10% in January.
 
Source: Capital Economics  
 
3. The current CPI breadth is similar to the levels we saw during consumption tax hikes.
 
Source: Simon White, Bloomberg Markets Live Blog  

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China

1. Home prices continue to fall.
 

 
2. Loans to developers have increased in recent years while housing mortgages continued to decline.
 
Source: Gavekal Research  
 
• State-owned developers could face financial distress.
 
Source: Gavekal Research  

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3. Hong Kong’s inflation slowed sharply last month.
 

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Emerging Markets

1. Mexico’s inflation continues to ease.
 

 
2. Argentina’s economic activity tumbled in December.
 

 
3. EM versus US rate spreads continue to compress.
 
Source: Barclays Research  
 
4. Options bets against EM currencies are increasingly out of favor amid improving EM exports.
 
Source: @markets   Read full article  
 
• Implied volatility across EM currencies keeps moving lower.
 

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5. This exhibit shows the comparative advantage in labor and geographic proximity across EM exporters, according to Moody’s Analytics.
 
Source: Moody’s Analytics  

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Cryptocurrency

1. Ether (ETH) significantly outperformed top crypto peers over the past week, boosted by spot-ETF hopes.
 
Source: FinViz  
 
Source: CoinDesk   Read full article  
 
• ETH’s rally triggered a large amount of short liquidations this week.
 
Source: Coinglass  

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2. This chart shows the distance from all-time highs across BTC currency pairs.
 
Source: @KaikoData  
 
3. BTC/JPY is testing its all-time high.
 

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Commodities

1. The post-pandemic rise in commodities versus the S&P 500 reversed amid weaker economic growth in China and global disinflation.
 
Source: Alpine Macro  
 
2. US farmers are confronting challenging economic conditions due to plummeting grain prices.
 
Source: Reuters   Read full article  
 

 

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Energy

1. US crude oil inventories climbed again due to reduced refinery capacity, but distillates stockpiles tumbled last week.
 
– Weekly changes:
 

 
– Levels:
 

 
– Refinery runs and utilization:
 

 
• Gasoline demand was soft last week.
 

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2. The declining levels of drilled but uncompleted (DUC) wells suggest that US output will slow without significant new investment.
 
Source: @WSJ   Read full article  
 
3. US natural gas in storage is now well outside the five-year range.
 

 
Source: @richardmeyerdc; h/t @dailychartbook  

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4. European natural gas futures hit their lowest level since 2021.
 

 
• Here is a look at how Europe cut its dependence on Russian gas.
 
Source: @financialtimes   Read full article  

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Equities

1. US indices hit record highs, fueled by Nvidia.
 

 
• Nvidia’s earnings growth stands out.
 
Source: @RyanDetrick, @sonusvarghese  
 
• The Magnificent 7 further widened their outperformance.
 

 
• The average stock in the Nasdaq 100 is increasingly lagging the index.
 

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2. Equity fund flows were strong last week.
 
Source: BofA Global Research  
 
3. Small caps underperformed sharply this year.
 

 
But small-cap flows have picked up.
 
Source: BofA Global Research  

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4. The quality factor has been widening its outperformance.
 

 
• Hedge funds are long momentum stocks, …
 
Source: Goldman Sachs; @MikeZaccardi  
 
… and are tilted toward growth vs. value.
 
Source: Goldman Sachs; @dailychartbook  
 
• Equity factor volatility has been trending higher, …
 
Source: @markets   Read full article  
 
… diverging from the broader market. Here is the momentum factor 60-day implied vol relative to the S&P 500.
 
Source: @TheTerminal, Bloomberg Finance L.P.  

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5. The S&P 500 skew remains depressed.
 
Source: Chris Murphy, Susquehanna International Group  
 
6. Here is a look at the S&P 500 performance excluding the tech megacaps.
 
Source: Goldman Sachs; @MikeZaccardi  
 
7. This chart shows the distance from all-time highs across major equity indices.
 
Source: Deutsche Bank Research  
 
8. Historically, S&P 500 cyclical stocks underperform defensives three months after the first Fed rate cut, but outperform going further.
 
Source: BCA Research  
 
9. The ETF market share is still very small compared to total equity market cap and total debt outstanding.
 
Source: iShares   Read full article  

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Credit

1. Money market fund inflows have been robust this year.
 
Source: BofA Global Research  
 

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2. Investment-grade bond funds continue to see healthy inflows.
 
Source: BofA Global Research  
 
3. Fewer corporate bonds are rated AAA and AA.
 
Source: Torsten Slok, Apollo  

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Global Developments

1. Dollar sentiment is improving from extreme lows.
 
Source: Barclays Research  
 
2. Rate cut expectations have moderated this month.
 
Source: @financialtimes   Read full article  

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Food for Thought

1. GMAT scores and wages:
 
Source: @financialtimes   Read full article  
 
2. Diaper inflation:
 
Source: @BW   Read full article  
 
3. US worker demographics in select occupations:
 
Source: @WSJ   Read full article  
 
4. Medicare Advantage plans:
 
Source: @WSJ   Read full article  
 
5. Synthetic opioids:
 
Source: The Economist   Read full article  
 
6. Social-media active users:
 
Source: The Economist   Read full article  
 
7. How popular are these words?
 
Source: The Washington Post  
 

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Have a great weekend!

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