Market Watch Trader

Weekly Economy & Market Watch - 30 Sep 2024

Recent economic indicators point to slowing inflation and a minimal recession risk, supporting a soft-landing outlook. The Fed's preferred August PCE inflation metric was lower than expected and came down even closer to the target. Meanwhile, Q2 GDP was confirmed at 3%, with Q1 growth revised higher from 1.4% to 1.6%. Even growth projections for 2022 and 2023 were also increased. The Fed’s GDPNow model forecasts robust Q3 growth at 2.9%.

Weekly Economy & Market Watch - 23 Sep 2024

On 18 September, the Fed surprised many analysts with a 50bps cut, a move usually reserved for crises. According to the Fed’s own assessment the economy is doing well and hence it appears the large cut was to preemptively protect against potential shocks, especially in the labor market. Although the Dot Plot indicates another 50bps cut by year-end, the Fed is likely to remain data-driven and might adopt a more gradual rate reduction strategy.

Weekly Economy & Market Watch - 16 Sep 2024

Economic data in the US continues to be mixed, keeping all possibilities open when the Fed meets to set rates. Just like the payrolls report earlier, the inflation data released last week showed improvement in headline CPI y/y, but core CPI remain unchanged y/y while on a month-on-month basis, core CPI moved higher. Wholesale inflation PPI was stronger than expectations, however, initial jobless claims ticked up, consistent with a gradual slowdown.

Weekly Economy & Market Watch - 9 Sep 2024

Lately, the Fed seems to be more concerned about a rapidly cooling labor market rather than inflation. Labor market data last week did not give a clear picture. Nonfarm payroll increased, but the previous two months’ figures were revised lower. Wage growth accelerated and unemployment rate fell, but on the other hand number of job openings reduced and the quits rate eased. This data by itself does not warrant a jumbo 50bps rate cut by the Fed on 18 Sep.

Weekly Economy & Market Watch - 19 Aug 2024

A range of US economic indicators has bolstered the belief that inflation is easing, and the economy will avoid a recession. Consumer inflation CPI and core CPI both continued to moderate in July. Additionally, wholesale inflation PPI saw a notable decline from the previous month. At the same time, July’s retail sales and NIFB small business confidence index beat estimates. Such data will help the Federal Reserve to start cutting rates in September.

Weekly Economy & Market Watch - 12 Aug 2024

For several years speculators have been borrowing in low-interest-rate Japanese yen and buying high-return assets like equities. Gradual weakening of yen further helped this carry-trade. However, now speculators have been caught off-guard with the 10% rally in yen from mid-July which became more aggressive after Bank of Japan raised rates on 31 July. Massive unwinding of this carry trade has accentuated the selloff in global equities.

Weekly Economy & Market Watch - 5 Aug 2024

Disappointing US nonfarm payroll data that showed fewer new jobs and higher unemployment rate, has suddenly stoked fears of recession. Earlier, data showed Americans filing for unemployment benefits rose to a one-year high and ISM manufacturing activity shrunk further to eight-month low. The futures market is pricing in over 120 bps of rate cuts by year end, with 93% probability of a 50bps cut in the upcoming September FOMC meeting.

Weekly Economy & Market Watch - 29 July 2024

PCE, the Fed’s preferred measure of inflation, came in soft in June with the headline number easing from last month while core PCE was flat y-o-y compared to May. US GDP grew by 2.8% annualized in Q2 after rising 1.4% in Q1 indicating that the economy is still faring well. Though this was well above projections, much of the gains were driven by inventory buildup. Anecdotal data from company results is showing weakness in consumer spending.

Weekly Economy & Market Watch – 22 July 2024

Last week’s economic calendar had upside surprises from retail sales and building permits, that jumped well above consensus pointing to strong business activity. However, on the other hand the number of Americans filing for unemployment increasing to 243,000, a nine-month high and continuing unemployment claims increased to 1,867,000, the highest number since Nov 2021, indicating that the labor market has started cooling off fast.

Weekly Economy & Market Watch - 15 July 2024

In many developed countries sovereign debt levels have shot up following the Global Financial Crisis in 2007 and further ballooned following the COVID Crisis. This trend is unlikely to reverse as consolidation of the fiscal budget is simply not a priority for policymakers. Rising debt levels had little impact on the budgets since interest rates have been close to zero but as rates have risen debt servicing is now becoming one of the major component of government expenditure. However, developed countries have the advantage of issuing debt in domestic currencies and their central banks can step in and purchase their own bonds when required. Interestingly, Germany in an outlier as it continues to adhere to the maximum permissible debt level of 60% of the GDP, mandated under the Maastricht Treaty that laid down the foundation for the European Union.

Weekly Economy and Market Watch - 8 July 2024

De-dollarization: The notion that the US dollar is losing its leading position in global trade or as a global reserve currency has been a persistent theme in the markets for the last decade. Data shows the dollar’s share of global reserve currencies has fallen over the years but remains dominant with 58% share – central banks are diversifying their holdings, not ditching the dollar. In terms of global trade (see chart), the share of US dollar in global Swift payments has been rising, up from 32% in 2011 to 45% in 2023 while the share of euro, its closest competitor, has dropped from 40% to about 21% in the same period. The share of Chinese yuan has risen as well and now makes up about 4.5% of global Swift payments. So far, the notion of de-dollarization seems to be more hype than reality.

Weekly Economy and Market Watch - 1 July 2024

Diamonds may not be for ever: Prices for rough diamonds has plummeted since a pandemic-driven boom, just like prices of luxury watches. To make matters worse, there is an ever-increasing supply of lab grown diamonds that are identical to natural diamonds and sell for one-third the the Key Highlights prices of natural diamonds. Their share of the market has risen rapidly to about 20% last year. On top of that, demand from rich Chinese buyers, once a large target market, continues to moderate. Consequently, the Zimnisky Global Rough Diamond Index, that had shot up by almost 60% after the pandemic, has fallen 26% from its peak in February 2022. Producers like De Beers, that have interest in both natural and lab grown diamonds are suffering.

Weekly Economy and Market Watch - 24 June 2024

Buying at record highs: Some investors may think that it is better to wait for a market downturn or correction before investing, rather than buying when the market reaches new highs. However, historical data suggests that investing at market highs can be a good strategy, as markets tend to keep their momentum and reach higher levels. In the chart here, the bars on the left (grey color) represent returns in S&P 500 price index over different time periods, if investments were made on any day randomly. The bars on the right (in green) represent investing on the day the market makes a new record high. Since 1950, there were many times when an investor who stayed out of the market near record highs would have missed the opportunity to enter at a lower price. The chart here shows that from 1988 the returns from buying on any random day are similar to returns when buying at a record high. In fact, if investments are held for longer durations, the returns when buying at market peaks get even better.

Weekly Economy and Market Watch - 10 June 2024

The AI chip producer Nvidia has become the third company to cross the $3 trillion market cap, after Apple and Microsoft. It is now the second most valuable company on planet, after Microsoft. Nvidia has been the poster child for investor enthusiasm in AI, which accelerated with OpenAI's release of ChatGPT in late 2022. The stock is up over 140% this year and 200% over the last year while the Nasdaq index has gained a modest 14% and 29%, respectively. Nvidia GPUs, which originated for the gaming industry, today commands 85% market share in the data centers business and generate 75% gross margins for the company. Nvidia is a chip designing company; its chips are manufactured primarily by Taiwan Semiconductor Manufacturing Company (TSMC), which is ninth on the list of top companies (see chart).

Weekly Economy and Market Watch - 03 June 2024

Cartier luxury watches were the only major brand to gain in value over the past year on the secondary market, based on the Bloomberg Subdial Watch Index. While the index declined 10.2%, Cartier watches made by the French jeweler, owned by Switzerland’s Richemont rose 2.4%. Demand for used watches by Cartier, best known for its rectangular Tank and square Santos models, climbed as collectors looked beyond so-called hype models like the Rolex Daytona or Patek Philippe Nautilus. Average prices for Cartier watches are also lower than Rolex and Patek, with many models changing hands for less than $5,000. The Bloomberg Subdial Watch Index has fallen about 36% in the last two years, as interest rates rose sharply and appetite for risk assets took a hit. Source: Bloomberg.

Weekly Economy and Market Watch - 27 May 2024

Performance of the European and the US markets was quite similar for almost two decades from 1990 till the Great Financial Crisis. However, since the US bull run started in 2009, the two markets have diverged significantly. Between 2009 and 2023, the outperformance of the US market resulted in cumulative S&P 500 index gains that are more than 5 times those of Euro Stoxx 50 index. Two main reasons, apart from many others, for US exceptionalism in equities are: i) Fueled by generous Quantitative Easing in 2009 the US economy bounced back quickly while the European crisis kept deepening resulting in a full-blown sovereign debt crisis in 2011 and fiscal austerity. ii) US technology companies took a global lead and their stock prices rocketed higher while their weightage in the S&P 500 index kept rising – now stands at 40%

Weekly Economy and Market Watch - 20 May 2024

Selecting an asset class to invest in can be a daunting task. This becomes even more difficult if you are planning for the long term, thinking about your retirement and beyond. Clearly, the best strategy is to pick assets that consistently grow above the rate of inflation. The only asset class that can do this over the long term is equities, which are shares in listed companies. Looking back at US asset prices, we can see that S&P 500 outperformed bonds and gold by a wide margin. $1 invested in equities in 1925 is worth $716 post inflation adjustment whereas the same invested in gold and Treasury bonds would be worth only $5.6 or $4.4, respectively, after adjusting for inflation. As a result, the only solution to build wealth over time is by participating in the productive capital: equities.

Weekly Economy and Market Watch - 13 May 2024

The central bank of Sweden, Riksbank, cut rates last week even as inflation is running above target. It has acted in advance of any European Central Bank cuts to support a sputtering economy even though this can lead to another bout of currency weakness that in turn can fuel import prices. In March, the Swiss National Bank had proactively cut rate, ahead of ECB, to prevent further appreciation of the franc.

Weekly Economy and Market Watch - 6 May 2024

Last week’s data showed that the labor market is finally cooling down: nonfarm payrolls and wage growth came below expectations while unemployment was higher than anticipated. Earlier in the week, the March JOLTS report also showed the easing of the jobs market. Softening labor market will have a direct impact in reducing overall inflation levels and hence is taken positively by the markets.

Weekly Economy and Market Watch - 29 April 2024

Equites ended a volatile week with a bang. Despite the fear of rates staying higher-forlonger, both S&P500 and Nasdaq clinched their best week since November. As equity markets remain forward looking, the rally seems to be broadening, which gives it more staying power. The overall earnings season has also been decent so far with 77% of the S&P500 index companies beating their earnings estimates.

Weekly Economy and Market Watch - 22 April 2024

The coming week is likely to provide further cues on the outlook for interest rates and the markets. The first estimate of the US Q1 GDP will be released on Thursday, April 25th . And on Friday April 26th the Personal Consumption Expenditure (PCE) data, which is the Fed’s preferred gauge of underlying inflation. Any surprise to the upside in GDP or PCE index is likely to strengthen the Fed’s case for keeping the rates higher-for-longer.

Weekly Economy and Market Watch - 1 April 2024

The Federal Reserve’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure (PCE) cooled in February after a very hot reading in January. The year-on-year data remained flat over the last month. Commenting on the data Fed Chair Jerome Powell said “pretty much in line with our expectations” but reiterated that the central bank is in no rush to cut rates

Weekly Economy and Market Watch - 25 March 2024

The strong economic data in the US masks a weakening consumer. The small top-end ‘Taylor Swift Economy’ has large, accumulated savings and investment gains and hence continue to splurge on recreation, tourism and of course $7,000 Taylor Swift tickets but the large majority who are in the ‘Average Joe Economy’ have run out of savings and raking up higher credit card debt and delinquencies while job openings are falling, and layoffs are rising.

Weekly Economy & Market Watch - 18 March 2024

Data last week painted a mixed picture about the outlook for inflation. The Consumer Price Index and Producer Price Index for February came in above expectations and confirmed the resilience of inflationary pressures. However, tepid retail sales growth in February, after a sharp drop in January, and weaker consumer sentiments reading suggested the economy is slowing down. This dichotomy is turning out to be challenging for policy makers and investors.

Weekly Economy & Market Watch - 11 March 2024

Data last week painted a mixed picture about the outlook for inflation. The Consumer Price Index and Producer Price Index for February came in above expectations and confirmed the resilience of inflationary pressures. However, tepid retail sales growth in February, after a sharp drop in January, and weaker consumer sentiments reading suggested the economy is slowing down. This dichotomy is turning out to be challenging for policy makers and investors.

Weekly Economy & Market Watch - 04 March 2024

The US January Core PCE (personal consumption expenditure), the Fed’s preferred measure of inflation came in line with consensus forecast, but it was the biggest month-on-month rise since January last year. On the other hand, consumer confidence inched lower in February while ISM manufacturing PMI dipped further into contraction territory with employment and new orders indices edging lower.

Economy & Market Watch - February 2024

The 5 pillars of the UAE economy in 2024
The UAE economy has displayed exceptional resilience in the face of rising interest rates. Growth in the population, booming tourism, a buoyant real estate market, surging non-oil economy and strong fiscal position of the government have been the drivers of the UAE’s economic strength in 2023. In this month’s report we will explore the potential of these five pillars of strength for the year ahead and assess the risks to our outlook.

Economy & Market Watch - January 2024

The onset of Covid-19 in March 2020 resulted in a global health crisis and plunged the world into extraordinary times. The simultaneous collapse of demand and supply wreaked havoc for the global economy. Policy makers responded with all their might using unconventional tools which then resulted in imbalances across national accounts, capital markets and households. Nearly four years since the outbreak of the pandemic, in 2024, the extraordinary times are over and the world is finally returning to normalcy. Here are the 7 themes that investors must consider for 2024.

Economy & Market Watch – December 2023

Wrapping up 2023: A year of many surprises

As the year comes to an end, we assess the significant changes in the economic and market outlook from the beginning of the year till now. Outcomes have been quite the opposite of what was expected, whether it was the outlook for the US or Chinese economy, or the prospects for equities and bonds.

Economy & Market Watch – November 2023

At peak rates?

To curb runaway inflation, the US Federal Reserve along with all the major central banks have increased interest rates to historic levels at an aggressive pace while also reducing their balance sheets but the economy, especially in the US, has been surprisingly resilient, underpinned by a strong consumer. It is a sort of a tug of war between the resolute Federal Reserve on one end and the resilient economy on the other. So far in this contest, the economy seems to have an upper hand; however, recent data points to signs of upcoming weaknesses. Investors are trying to evaluate if the Fed will increase rates again and when is it likely to cut them.

Economy & Market Watch – October 2023

Assessing the Path Ahead

The market’s assessment of interest rates has undergone numerous changes during the year. From projecting first rate cuts in June to no rate cuts in the year, the market is now considering the latest projections from the US Fed that keeps the door open for another rate hike before the end of the year. With the resolution of major supply side issues and cooling off food and energy prices, the easy part of the battle against inflation is now behind us. The path from here onwards up to the final target of 2% inflation will be more unpredictable as some factors continue to support consumer spending while others create tighter financial conditions. The path forward may be more volatile as rates may stay higher for longer and policy makers become more data dependent.

Economy & Market Watch – September 2023

Higher for Longer...

Inflation data in the US continues to head in the right direction but economic growth remains surprisingly strong despite the onslaught of sharply higher interest rates. However, this means the Federal Reserve has not finished its job yet and interest rates are likely to stay higher for longer. Only a disorderly market.

Economy & Market Watch – August 2023

Heading for the Goldilocks Zone!

Central banks in developed markets continue to tighten whereas the economies continued to be resilient. At the beginning of the year, it was a foregone conclusion that consumers and corporates will not be able to withstand the onslaught of the historically sharp increase of interest rates; but both have held up surprisingly well. Now there is a growing belief that central banks can manage a ‘soft landing’ with weaker grow

Economy & Market Watch – July 2023

Higher Rates, Slowing Economic Activity

Persistent inflationary pressures are forcing central banks to stay hawkish even as economic activity continues to slow down. Markets are repricing further rate hikes in the coming months while pushing back any expectations for rate cuts any time soon. Interestingly, equity markets seem to be unfazed by this hawkishness and worsening economic outlook. Meanwhile, bond markets continue to point towards an impending recession.

Economy & Market Watch – June 2023

Slower Road to Normalization

Central banks across the developed markets increased interest rates in May as inflation remains far above their target levels. Mixed data and statements from various central bank officials kept the debate about the future of monetary policy alive.

Economy & Market Watch – May 2023

Who is right: Equities, Bonds or the Fed?

US economic data released in April has given mixed signals about the taming of inflation: there have been many signs of a slowdown in economic activity yet inflation remains far in excess of the target and certain elements of inflation remain sticky and resilient. Central banks now face a complex trade-off between further tightening the policy to control inflation versus pushing the economy into a bad recession. Analysts, investors and even central bank officials seem to be divided on their outlooks. As a result, signals coming from equity markets, bonds and the Fed are quite at odds with each other.

Economy & Market Watch – April 2023

Central banks back to fighting inflation

The month of March was characterized by an extreme level of volatility in the bonds market due to banking crises across both sides of the Atlantic and surprisingly sanguine and calm equity markets. Having ringfenced the banking crises with a firm resolve, central banks across the developed markets brought their focus back to their number one battle: to bring inflation back to their target levels

Economy & Market Watch – March 2023

Bumps along the way

Investors felt confident in January that the economy was slowing down sufficiently to encourage central banks to pause after a series of aggressive rate hikes, but a set of strong data in February has suddenly changed that view. Optimism that drove shares and bonds higher in January has flipped to worries about interest rates going higher and staying higher.

Economy & Market Watch – February 2023

Aggressive interest rate hikes by central banks over the last 10 months is working its way through the system and having the desired effect of bringing down inflation and slowing down economic growth. Yet, the global economy is performing better than what was anticipated just six months ago. At the same time, Q4 2022 company earnings, released so far, continue to beat investor expectations. Along with other factors, financial conditions look less dire than feared and hence the markets have started the year on an optimistic note.

CBD Macro Economic Outlook Event – 1 February 2023

• Why are the interest rates going up?
• How high will the rates go?
• When will they get cut?
• What is the outlook for equities, bonds, USD and oil?
• What is the outlook for the UAE?
• Where should I invest now?

Economy & Market Watch – January 2023

While the year started with a firm belief that pandemic-era supply side constraints were easing and inflation would be transitory, the actual situation turned out to be completely different. Inflation in much of the developed world started rising rapidly and touched levels last seen four decades ago. The two main drivers were the war in Ukraine that has inflated energy and food prices and tightness in the labor market that drove unemployment levels to 50-year lows and wages growth to historic highs. With inflation looking well entrenched, rather than transitory, central banks pivoted from their dovish stance at the beginning of the year to aggressively hike interest rates to prevent inflation from spiraling out of control.