Weekly Market Perspectives: Central Banks Hold Rates Amid Strong Economic Data

Published: February 7, 2024

It was a huge week for global investors as several central bank policy decisions grabbed the headlines. The US Federal Reserve, European Central Bank (ECB), and the Bank of England (BOE) decided to hold rates steady, but all communicated a bias for interest rate cuts to start later this year. Markets were largely expecting the rate decisions, however global investors were hoping for central bankers to bring interest rate cuts earlier in 2024. Other headline-grabbing news revolved around US labor market strength and the biggest week for Q4 2023 corporate earnings. Continuing economic strength will keep an upward bias on current rates, which may cause a regular re-pricing of policy expectations. After all the dust settled, the S&P 500 Index traded higher by 1.4%, helped by earnings strength, while the Bloomberg US Aggregate Bond Index closed 0.7% higher on the back of lower long-end yields.

The week’s main event was Wednesday’s Federal Reserve policy decision and Chair Powell’s press conference. The Federal Reserve Open Market Committee (FOMC) left rates unchanged at 5.25%-5.50%, a move largely expected by the markets. However, the commentary around the next policy decision was more hawkish than investors wanted to hear. Powell and other central bankers expressed concerns about inflation and highlighted the strength of the labor market and consumer spending as a risk. Powell effectively eliminated the possibility of a rate cut in March – “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen.” Several more data points on inflation and the labor market will publish ahead of the March and May meetings, with the latter marked as the likely target for the first rate cut. In the same way, the ECB and the BOE elected to maintain the current policy stance, and suggested the first rate-cut decisions would come this summer. The ECB would likely bring rate cuts forward following economic weakness while the Bank of England cited inflation pressures remain too high in the region, keeping an upward bias on rates. Global markets reacted negatively as investors re-priced the timing of future cuts.

Rate Cut Pricing Pushed Out After Jobs Report
Federal Funds Rate expectations based on Fed Funds Futures

Source: Bloomberg. As of February 2, 2024.

The labor market provided several points of renewed resilience this week, marked by several key indicators First, the JOLTs—or job openings and labor turnover survey—showed 100k new jobs were posted in December, with previous figures revised higher by 150k.. Job openings rose to the highest in three months, reflecting employers’ sustained confidence in the economy and their intentions to add headcount.

In addition, the JOLTs report showed a three-year low in the quits rate, indicating workers are less confident of finding a new position if they leave their current job. Next, the ADP measure of private employment showed a relatively modest increase of 107k jobs in private payrolls on Wednesday, with a downward revision to December’s figures.

Finally, the main labor report from the Bureau of Labor Statistics (BLS) on Friday showed 353k jobs were added in January, blowing past all estimates. December’s figures were revised higher by more than 100k jobs, signaling the labor market remains robust. January holds strong seasonal effects that drove a substantial rise in December and January but still caught economists and analysts by surprise. The unemployment rate held at 3.7%, while hourly wages accelerated 0.6% from a month earlier—marking the most significant increase since March 2022. Shortly after the release, markets pushed the probability of a rate cut lower, as outright labor market strength will likely be met with a bias to keep financial conditions tight.

Blockbuster Report: US Payrolls Pick Up Steam in the New Year
Based on nonfarm payrolls

Source: Bloomberg, Bureau of Labor Statistics.

Last week marked the busiest of earnings season, with a blockbuster line up of companies reporting. Nearly 40% of S&P 500 companies, measured by market cap, reported last week contributing to positive sentiment. To date, 79% of companies reported positive surprises to their Q4 expectations, slightly ahead of historical averages, while earnings growth has come in around 5.4%, well above the 1.2% growth expected prior to earnings season. While 35% of S&P companies are left to report, indications are pointing solid earnings season.

S&P 500 Index Earnings: Reported vs Expected

Source: Bloomberg, S&P As of February 2, 2024.

Five constituents of the Magnificent Seven reported beats on the top and bottom lines last week, but some found expectations were difficult to match.

META: Facebook parent company, Meta Platforms, announced better-than-expected revenue and earnings growth, established a quarterly dividend, and increased the share buyback program to $50B. Better fundamental performance powered Meta higher by over 20% following the announcement.

AMZN: Amazon pushed higher after posting strong sales and earnings growth. Cost-cutting initiatives last year and a better outlook for corporate profitability pushed the stock higher by nearly 10%.

AAPL: Apple announced strong growth, but China’s economic slowdown and regulatory crackdown weighed on sentiment. Even still, iPhone sales and services came in better than expected. The stock fell 5% before recovering some of its losses.

MSFT: Microsoft reported better-than-expected fundamental growth, particularly in their AI and cloud businesses, but the stock fell on guidance relative to the elevated expectations of AI expansion. Shares slid 3% before recovering to end the week higher by almost 2%.

GOOGL: Google parent Alphabet also provided better-than-expected revenue and earnings but missed performance targets in the core search and advertising businesses. The stock dropped around 8%.

The specific securities referenced herein are discussed for illustrative purposes only and may or may not be held in any strategy of client accounts. The security used in this example were selected because of their overall size, not solely based on performance.


-Written by Eric Schmitz, CFA