MFS Week in Review
A review of the week's top global economic and capital markets news.
A review of the week's top global economic and capital markets news.
For the week ending 3 May 2024
As of midday Friday, global equities were higher on the week as fears over the potential for the U.S. Federal Reserve to shift gears toward rate hikes vanished. The yield on the U.S. 10-year Treasury note fell 17 basis points on the week, to 4.50%, while the price of a barrel of West Texas Intermediate crude oil fell to US$78.75 from US$84. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 13.8 from 15.4 last Friday.
MACRO NEWS
Softer-than-expected payrolls send U.S. yields lower
Markets breathed a sigh of relief on Friday morning as yields on U.S. Treasuries tumbled after April nonfarm payrolls grew a less-than-expected 175,000. The number fell considerably short of the 240,000 consensus forecast, and the prior-two-months reading was revised down by 22,000. The unemployment rate rose to 3.9%, up 0.1% from March, while average hourly earnings grew less than anticipated. Along with a rise in job openings data released earlier in the week, investors are seeing signs that tightness in the labour market is easing. After the data, markets were quick to price in a second rate cut by the Fed before the end of the year, with the first fully priced for September. Additional soft data were reported midmorning on Friday as the Institute for Supply Management’s nonmanufacturing index fell to 49.4, the lowest reading since December 2022.
Fed’s Powell says rate hikes unlikely
Ahead of Wednesday’s press conference following the latest Federal Open Market Committee meeting, markets were primed for a “hawkish hold” after a series of hotter-than-expected inflation prints. Instead, Fed Chair Jerome Powell said it is “unlikely” the next policy move will be a hike and that rate cuts remain the Fed’s base case, only later than expected. Additionally, the FOMC voted to slow the pace of quantitative tightening by more than expected beginning in June, allowing US$25 billion a month of Treasuries to roll off the balance sheet from the current US$60 billion a month. Markets expected a US$30- billion-a-month pace. Powell said he remains confident that inflation will moderate over the balance of the year, though he is less confident than he was earlier. The post-meeting FOMC statement acknowledged that there has been a lack of further progress toward the committee’s 2% inflation goal in recent months. Markets rallied strongly after Powell took hikes off the table, though the gains faded away late in Wednesday’s session and stocks closed lower on the day, though they rallied on Thursday and early Friday.
BOJ acts to stabilize yen
The Bank of Japan intervened several times this week to try to halt the yen’s rapid slide. On Monday, the currency fell to 160.17 versus the U.S. dollar, a fresh 34-year low. It recovered to 152.35 after authorities purchased nearly $60 billion worth of yen on foreign exchange markets during the course of the week and on Friday’s news that the growth of U.S. payrolls has slowed. Wide interest rate differentials, particularly between Japan and the U.S., have helped undermine the yen. On Thursday it was reported that Japanese authorities are considering tax breaks on the repatriation of Japanese corporate profits held overseas, which would prompt companies to buy yen, creating a capital inflow. While Japan has substantial U.S. dollar-denominated currency reserves, selling them would require the BOJ to liquidate some of its holdings of U.S. Treasuries, potentially pushing up U.S. yields and exacerbating the interest rate differential, which illustrates the difficulty Japan faces in stabilizing the yen if it does not adjust monetary policy to narrow the U.S.–Japan rate gap.
QUICK HITS
EARNINGS NEWS
With about 80% of the constituents of the S&P 500 Index having reported for Q1 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings slightly rose around 4.9% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 4.1% year over year. According to Bloomberg, about 80% of reporters have beaten estimates.
Past performance is no guarantee of future results.
Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
This commentary was first published in the United States by MFS and is distributed in Canada by SLGI Asset Management Inc., with permission.
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