Feb 28th Market Note
Markets cautious ahead of PCE
I skipped writing about the market for the last two days as there wasn’t anything new to report as evidenced by the markets little movement across major asset classes (except crypto).
In equities, the S&P 500 is hovering just below its all-time highs, having traded in a tight range since NVIDIA results last week. Under the surface, I am seeing some rotation as TSLA which didn’t participate in the MAG7 rally YTD is rallying this week. Though for the year, TSLA is still down 18%, the biggest laggard following AAPL (-2.5%) and GOOG (-1.6%).
On the rates side, the 10Y treasury notes are trading close to 4.30% as growth and inflation expectations continued to move higher.
With regards to Fed Funds pricing, the amount of Fed cuts priced in 2024 inched down to 77bps, so now essentially in line with the 75bps of cuts penciled in by the median FOMC dot back in December. Given the progress we have seen so far, it will be hard for the market to price in even fewer cuts even if the PCE number is hotter than expected tomorrow.
On the economic data front, the Conference Board’s latest consumer confidence reading for February was down to 106.7 (vs. 115.0 expected), which is the first decline in four months. However, the Atlanta Fed’s GDPNow model marginally upgraded its estimate for Q1 growth to an annualized 3.25%. If realized, that would be a third consecutive quarter with growth above 3%.
In Japan, inflation slowed less than expected in January, rising +2.2% y/y (vs. +1.9% expected) though down from the previous month’s +2.6%. In response, the yields on Japanese Government bonds rose to their highest levels as the likelihood of BOJ exiting its negative rate policy by April has risen substantially.
Moving to politics, in the recent Michigan primary elections, both President Joe Biden and the leading Republican contender, Donald Trump, secured victories within their respective parties. However, the election outcomes revealed a notable level of dissatisfaction among both Democratic and Republican voters regarding their anticipated nominees. Progressive activists and Arab-American leaders had called on Michigan's Democrats to cast their votes as "uncommitted" rather than in favor of Biden, signaling concerns about his potential re-election campaign against Trump in this pivotal battleground state. With the majority of votes tallied by Wednesday morning, approximately 13 percent of primary voters opted for "uncommitted" — a figure significantly lower than Biden's 81 percent but nonetheless representing over 100,000 individuals in Michigan expressing their discontent with the President. This internal discord presents a significant challenge for Biden's campaign, sparking worries among some Democrats about his ability to rally the party's center-left coalition in his favor come November. The election results underscore the precarious nature of the political alliances formed in Michigan, a key state for the upcoming presidential election. Both Biden and Trump face the risk of losing crucial support; Biden won Michigan by around 150,000 votes in 2020, while Trump had previously secured the state by approximately 11,000 votes in 2016.
Elsewhere, major news outlets reported that the Republican Senate leader Mitch McConnell will step down as his party’s leader after the November election.