April was a weak month for the indices in general, particularly the American ones. After a strong first quarter, in election years, the months of April, May, and June tend to be weaker.
For now, it’s not yet time to sound the alarms; the S&P500 has managed to hold above 5000 points for the third consecutive month. Its first negative month since October.
In Wall Street
Taking a macro view on Wall Street, practically all data leaned negatively for market interests and the Fed, all pointing towards the same direction, which is stagflation:
Inflation Commentary
April’s inflation data, referring to March, surprised on the upside, deviating significantly from expectations:
The figure exceeded expectations; the general figure increased by 0.4% month-on-month, compared to the expected 0.29%, leaving the year-on-year figure at 3.5%, a considerable jump from the previous month’s 3.2% and the expected 3.4%.
Much of this increase was due to rising energy prices (the energy index rose by 1.1% in March) and the housing index, which increased by 5.7% over the past year, representing more than 60% of the total 12-month increase in the core index, which stood at 3.80%.
Perhaps the most concerning point of inflation was the surge in services; practically all subcomponents increased on both a monthly and yearly basis.
Reviewing the core personal consumption expenditures (PCE) price index, which is a more significant data point for gauging real inflation trends, it rose by 0.32% in March, leaving the year-on-year figure at 2.8%. This figure, while exceeding forecasts, was largely in line with expectations.
Similar to the headline inflation figure, the worrisome aspect lies in services, which increased on a monthly basis across all subcomponents. While there’s no risk of a resurgence akin to the catastrophic images compared to the 1980s, there is a high risk of inflation stabilizing above the 2% target, or even higher.
Commentary on Economic Growth
If all media outlets are discussing stagflation, high price increases must be accompanied by negative economic growth. The reality is that we still seem far from that, but there is a clear slowdown in recent quarters:
The US economy grew by 1.6% in the first quarter of the year, lower than the expected growth of over 2.1%, showing a clear deceleration from the 4.9% and 3.4% seen in previous quarters.
Looking at the data, it’s evident that personal consumption continues to be the mainstay supporting economic growth, but it slowed to add only 1.68% (more than 100% of the figure) from the 2.2% in the previous quarter. The key to the weak figure was found in net trade, which, after contributing 0.25% to the fourth-quarter GDP figure, subtracted 0.86% from the real figure in the first quarter.
Therefore, the important point still lies in consumption, perhaps more burdened than expected by high inflation, and the personal savings rate suffers, falling to its lowest level since November 2022, at 3.2%. In August 2020, it reached nearly 30%, and prior to the pandemic, it hovered around 8%.
The March ISM manufacturing data recovered expansion after 16 consecutive months in contraction territory (below 50). However, it seems likely that in the coming months, it will struggle to maintain expansion levels.
On the other hand, the big surprise came from the services sector, plummeting to 51.4, its lowest level since December and well below forecasts around 53. Price pressures in the data were indeed in the opposite direction compared to previous reports, showing their lowest level since March 2020.
Commentary on Employment
Unlike other central banks, the Federal Reserve has two mandates: price stability (the sole mandate for other central banks) and full employment.
Looking at the latest employment data, both in manufacturing and services, they remained weak, below the 50 level. However, looking at non-farm payrolls and the unemployment rate, it was a strong month.
The BLS reported that 303,000 new non-farm payrolls were added in March, the highest figure in 10 months and exceeding expectations of 200,000.
Unlike previous months, when the Household Survey reported steep declines in the number of actually employed workers, in March, employment finally increased by 498,000 to 161.466 million, marking the first monthly increase in the past 4 months.
This brings the unemployment rate down to 3.8% in March. It has remained below 4% for 26 consecutive months, the longest period since the late 1960s.
Digging into the details, it’s debatable to speak about the quality of this employment: the number of part-time jobs surged by 691,000 to 28.632 million, up from 27.941 million, while full-time jobs decreased by 6,000 to 132.940 million from 132.946 million.
But the reality is that in absolute terms, employment remains robust.
A point related to full employment and inflation is compensation costs, which remain elevated:
Civilian worker compensation costs in the United States rose by 1.2% in the first quarter of 2024, accelerating from a 0.9% increase in the previous quarter and surpassing the market consensus of 1% growth.
Labor costs recorded the largest increase in a year, as wages and salaries advanced by 1.1% (compared to 1.1% in the fourth quarter), and benefits increased by 1.1% (compared to 0.7%).
In Europe
In the Eurozone region, price pressures appear to be lower (due to the base effect), and economic growth has been particularly surprising.
The annual inflation rate showed steady growth of 2.4% in April, in line with market expectations.
The core inflation rate, which filters out the volatility of food and energy prices, was at 2.7%, down from March’s 2.9%.
It’s worth remembering that this is compared to the April 2023 rate, which was at 5.6%, practically the peak of this cycle.
Regarding GDP, the Eurozone economy grew by 0.3% in the first quarter of 2024, marking the fastest growth rate since the third quarter of 2022. This surpassed market expectations of a marginal expansion of 0.1% and gained momentum following a series of subdued readings since the fourth quarter of 2022.
Extra
As of May 1st, all these factors have led to the yields of both German and U.S. 10-year bonds closing near yearly highs: 4.69% for the U.S. 10-year yield and 4.58% for the German.
A special mention within the macroeconomic window is the currency section, with a focus on the JPY:
The dollar has closed its fourth consecutive month on the rise. Against the euro, it has gained 1.15%, with increasing speculation about the possibility of the ECB cutting rates in June, before the Fed, which plans to do so in July or September (although this varies considerably). In light of this, the ECB also needs to consider that its year-on-year rates are close to 2% due to the base effect, and that everything indicates they will stabilize near 3%, against a dollar that dominates global trade. Lowering rates before the Fed could trigger unintended consequences.
Turning to Japan, as a special mention, it is at a crossroads. Its currency has lost 12% of its value against the dollar so far this year. The BOJ doesn’t have much room to raise interest rates due to the high interest payments it would incur, and such a devalued currency, while beneficial for exports, tourism, and higher profits for foreign investors, is unsustainable given investors’ search for refuge elsewhere.
It reached its lowest level in 34 years against the dollar, and strong rumors point to recent interventions by Japan’s Ministry of Finance selling reserves in dollars and buying the Japanese currency. This would be the first move since late 2022. However, there is no confirmation of this beyond the movement seen on Monday, April 29th.
Latest publications
The Week in the Markets
Portfolio Management
Investor Resources
