Financial Update from Brewin Dolphin - 9 February 2024

February 2024

The Weekly Round-up

Friday 9 February 2024.

In her latest weekly round-up, Janet Mui, our Head of Market Analysis, discusses market performance and rate cut expectations, reassuring economic data from around the world, and economic developments in China.

This week has been quieter in terms of market movements and general news flow, after an eventful last week saw corporate earnings reports and central bank meetings. To recap, while central banks are leaning on rate cuts this year, they are willing to wait for more evidence of inflation moving sustainably back to target. Traders have largely abandoned the idea of a rate cut in March, though they still think there is over a 50% chance of a rate cut in May.

Bond yields have moved slightly higher as the timing of rate cuts are pushed back. US ten-year treasury yields have largely traded within 20 basis points in either direction of 4% in the past few weeks. The higher yield over the past week did not deter the S&P 500 index from edging higher, passing the historic and psychological 5,000 mark. Indeed, the current corporate earnings season continues to paint a picture of resilience in the economy, and the earnings beat-to-miss ratio remains around 80%.

Overall, we think the direction of travel matters more than trying to speculate on when the cut occurs. Historically speaking, barring a recession, both bonds and equities tend to deliver strong positive returns in the 12-24 months after the first Federal Reserve rate cut.

Reassuring economic data

The latest economic releases in major developed economies leant on the positive side last week. The final measure of the services purchasing manager indices (PMIs) saw an acceleration in the UK, US, and Japan, for instance, while the struggling manufacturing sector also shows signs of bottoming out. The latest US Institute of Supply Management services PMI beat estimates and improved across major measures such as employment and new orders.

US initial and continuing jobless claims have ticked down in the latest readings, which come just after the blowout jobs data of last Friday. While some of these data are lagging in nature, the resilient trend does add to the argument of a ‘soft landing’.

For Europe, economic vulnerability is higher and the GDP growth outlook remains uninspiring relative to the US. But recent economic data has offered some hope. Germany factory orders have been an outsized expansion in December and its services sector business survey turned less negative. The contraction of Eurozone producer prices points to slowing inflation, which would allow the European Central Bank to cut rates later.

In the UK, there are signs of revival in the housing market as mortgage rates have fallen against the backdrop of rate cut expectations. Halifax reported that UK house prices increased at their strongest pace since mid-2022, as its measure rose 1.3% in January and 2.5% from a year ago. Similarly, Nationwide has reported UK home values rose by +0.7% in January.

Overall, the UK housing market has held up much better at the start of 2024 than most analysts were expecting at the start of 2023. On the supply side, the S&P Global UK Construction PMI survey turned less negative in January. While UK economic growth is subdued and quarterly GDP growth has been hovering around the 0% line, the positive developments in the housing market are supportive of consumer sentiment.

The year of the dragon begins

Now, contrast that with the latest economic data from China and this week’s wild swing in Chinese markets. As China celebrates the year of the dragon and embarks on a week-long holiday, there are bound to be frustrations and negative discussions around dinner tables as retail investors and property owners collectively become poorer.

Chinese officials are desperately trying to arrest the stock market rout with several headline-catching news pieces this week.

Firstly, China has replaced the head of the Chinese Securities Regulatory Commission, as it tries to project an image of a huge makeover. Such personnel change may prompt expectations of sweeping changes at the regulator, and more forceful rescue plans for the crippling stock market.

We then had reports of state fund purchases, the establishment of a market stability fund, and restrictions on short selling by brokerages. While there has been an initial bounce, it was short lived.

These measures are like a band-aid for many fundamental and structural issues facing the Chinese economy.

This week, China reported its deflation had worsened in January, with prices falling by 0.8% year-on-year, the worst result since 2009. Some of that price weakness could be due to seasonal factors (different Chinese New Year timings) or pork prices slumping, but ultimately, underlying demand weakness is to blame. The problem with deflation, as the latest data shows, is that once prices fall, it may get more entrenched in consumers’ and businesses’ psychologies. If one expects goods or houses will get cheaper, why buy now?

One good thing about Chinese deflation is that it will help export lower goods prices to the rest of the world. Weak Chinese growth will also help to keep energy and industrial commodity prices in check, all else equal. Although further easing measures from China may not drive its domestic stock market higher, they may indirectly benefit Western companies with sales exposed to China.

The transition to the year of the dragon is exciting, and for those who are superstitious, it may bring about new energy and fortune. However, practically speaking, the profound issues in the property sector will take years to resolve. The relationship between the state and private companies is also unlikely to change anytime soon, whichever zodiac year we are in.

For a more in-depth discussion, you can read our "year of the dragon" China insight article here.