Seasonal Weakness Hits
Equity markets continued their weak month of April last week with the S&P 500 approaching a -5% fall from its late March ATH’s. The S&P 500 fell -3.2% by last Friday on the week, with technology, consumer discretionary and communication services posting the biggest declines alongside some steep selloffs from the likes of Netflix and NVidia and other semi stocks. The S&P 500 had its worst week in more than a year, and the Nasdaq is on a four-week losing streak. Skepticism that AI will meaningfully boost profits is dragging down the tech sector. Since the Nasdaq peaked last month, the largest US tech companies have lost more than $930 billion in market value. Nvidia alone lost $212 billion in value on Friday, its biggest plunge since March 2020.
Interest rate cut expectations fell with Fed Chair Powell suggesting last week that the likelihood of near-term easing is declining. This comes in the wake of stronger job data, albeit questionable’ Real-time market inflation data as measured by break even inflation rates actually peaked last Wednesday, much as they did 3-4 days in front of the late October 27-30 lows last year in front of the 1100 point S&P 500 move higher.
U.S. equity futures are up this morning after the S&P 500 closed in negative terrain every day last week. Attention this week will move to earnings reports and economic data, as markets look for clues on the timing of the first Fed rate cut. U.S. Treasuries and the dollar have stabilized following large swings last week, spurred by Middle East tensions and hawkish comments from FOMC officials. Yields on the 10-year are around 4.65% while WTI is around $83.
Rate cut expectations continue to get dialed back, with Fed Chair Powell suggesting last week the likelihood of near-term easing is lower. This comes in the wake of sturdy jobs market data and slow progress in underlying inflation metrics. For example, 3-month annualized rates of core and super core inflation, in both the CPI and PCEPI, are running in the 3.5%-to-8.2% range. And for each of those four individual indicators, the 3-month rate has accelerated above the 6-month rate, which is also above the 12-month rate. This is not the stuff of rate cuts. As Powell said this week, “the recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence”. After getting hopped up on rate cut expectations coming into the year, when there was about 125 bps of easing priced in, the market is now pricing in just 40 bps, with the first full 25 bps only occurring by November.
Safety areas, prior YTD laggards, led stock gains last week. Staples and healthcare stocks icked up ground.
For now, Fed rate cut expectations sit between 2-3 rate cuts in 2024. Like the “Goldilocks”, bull-market run in 1995, the markets expect the first interest rate cut in July.
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