Market index returns

Week to date since April 17, 2024 as of April 24, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

• Growth slowing…not so fast my friend: The first cut at 1Q24 GDP was released this week with the headline print coming in well below expectations at 1.6% Q/Q SAAR.  This is the first sub 2% print on headline real GDP since the 2nd quarter of 2022 and on the surface might point to a slowdown in U.S. economic activity.  However, if you peel back the onion just one layer you’ll find that underlying demand continues to be robust. Final sales to private domestic purchasers, which measures the consumption and investment components of GDP, grew at a clip of 3.1%, right in-line with trend for the past few quarters.  This strong print was driven by gains in services spending (4.0% Q/Q SAAR) and fixed investment (5.3% Q/Q SAAR).  One layer deeper you can find that fixed investment was driven by manufacturing structures (13.9% Q/Q SAAR), intellectual property (5.4% Q/Q SAAR) and residential (18.1% Q/Q SAAR) – the biggest growth number we have seen since the 1st quarter of 2020.  The strength in the consumer was confirmed on Friday as well in the PCE consumption report, with real consumer spending during March coming in at 0.5% M/M or a 6.3% annualized rate. 
• Speaking of PCE: In what has become one of the more anticipated macro releases on a monthly basis, the PCE price index was released on Friday as well.  In what was telegraphed by the GDP deflator report on Thursday, core PCE rose 0.3% in March with some slight revisions higher in both January and February.  Overall in 1Q, core PCE grew at a 4.4% SAAR rate, significantly higher than what the Fed and many market participants were expecting (hoping for).  Core services continues to be the driver of both higher prices in the PCE and CPI measures, growing 0.4% during the month and 5.5% SAAR during 1Q.  On the bright side, the core PCE year on year measure fell to 2.82% in March, the lowest we have seen since March of 2021.  Looking forward, unless the sequential monthly in core PCE starts to fall off, we will see that year-on-year measure begin to creep back up about 3% by the end of the second quarter. 
• In the Zone (Eurozone): Europe’s economy is working back toward growth mode, as Hamburg Commercial Bank (HCOB) released preliminary April PMI data for the Eurozone this week. Composite PMI at 51.4 hit an 11-month high, exceeding expectations, and has now expanded for two months in a row after being in contractionary territory since June 2023. Services PMI at 52.9 also hit an 11-month high, exceeding expectations, and has been in expansionary territory for three months in a row. In contrast, Manufacturing PMI at 45.6 failed to meet expectations, declined from March’s level, and has been in contraction since July 2022. Looking at individual countries, Germany moved back into growth mode for the first time in ten months, while France showed improvement but remained in contraction. The aggregate of countries excluding Germany and France showed even faster expansion, a welcome sign for the region. Overall, HCOB’s Chief Economist, Dr. Cyrus de la Rubia, noted, “The eurozone got off to a good start in the second quarter” and is forecasting 0.3% GDP growth in the Eurozone for the second quarter, which would match the pace of the first quarter this year. 
• BOJ won’t fight the tape: The Bank of Japan (BOJ) held policy steady during its meeting this week. The BOJ new median forecast for inflation of 1.9% in both 2025 and 2026 falls just short of its stated 2.0% goal. The BOJ’s assessment is that underlying inflation dynamics continue to converge more durably toward 2% but only gradually, and will need to be fostered by “accommodative financial” conditions. Some media reports had suggested the BOJ may cut its remaining QE to help the ailing Yen but the BOJ has essentially left Ministry of Finance (MOF) to deal with persistent currency weakness. Ueda, the lead central banker, confirmed that its initial move out of negative rates and YCC is not one and done and therefore we would expect further increases towards neutral to materialize in the July to October window. 

• Seniors to get more care (Real Estate): New rule proposals in the U.S. from the Centers for Medicare & Medicaid Services (CMS) will require nursing homes to give 3.5 hours of daily direct care to patients, up from 3.0 hours in the previous proposal. While this is good news for the residents, it’s bad news for the operators and landlords. There is still time before these rules take effect (3 years for non-rural facilities and 5 years for rural), but they will almost certainly lead to lower rent coverage ratios for operators given the additional labor costs involved and could place extra scrutiny on the healthcare REITs that own skilled nursing facilities. Nursing homes have struggled with finding enough qualified nurses since the COVID pandemic, and although these labor issues have been abating, there could still be some exceptions to the new rules if not enough licensed nurses live in a given area. These new regulations are receiving pushback, and there are currently bills moving through both houses of Congress that could block the new rule, but no outcome is certain at this point. However, one bright spot is that we believe that nursing home occupancies should be trending higher with favorable demographics and as we put the COVID pandemic further behind us, which could help alleviate some of the potential margin concerns. 
• Give me power (Real Estate & Infrastructure): Euphoria and optimism over artificial intelligence (AI) have been driving demand for data center space. Data center REITs are coming off a record year of leasing, and demand is only expected to grow, as this is the space where high-performance servers reside, allowing AI to perform its “magic.” However, these servers require an enormous amount of power, with one U.S. electric utility company estimating that dedicated AI server racks require 7x more power than traditional data center racks. They also expect major tech companies to invest over $1 trillion in data centers over the next five years, and that power requirements will grow in excess of 15% per year over the same time. This could even be an underestimate, as Blackstone, in a recent earnings call, recognized “a paradigm shift around demand for data centers” and noted it is a primary growth driver for them. In another example, last month, Amazon acquired a 960MW data center in Salem Township, PA for $650M which is 100% powered by an adjacent 2.5GW nuclear facility owned by Talen Energy. What is unclear is how others will source their power for new data centers, though the Chairman and co-founder of Kinder Morgan (NYSE: KMI), Rich Kinder, has an idea. Mr. Kinder recently stated he expects data centers to use ~20% of all electricity generated in the U.S. by 2030, and natural gas-fired plants must be part of the solution. 
• That’s a lot of trees! (Natural Resources): With Arbor Day occurring this week, we wanted to highlight a source of tree planting that might come as a surprise. Timber companies are known for cutting down trees and turning the wood into lumber and other products and materials, but they are also a major source of tree planting. Afterall, they need to replenish their inventory, and what better way to do it than to plant seedlings and let Mother Nature take its course. The largest timberland company in the U.S., which is organized as a listed REIT, Weyerhaeuser (NYSE: WY), publicly states they plant over 110 million trees each year and reforests 100% of the timberlands they harvest. A smaller U.S. timber REIT, Rayonier (NYSE: RYN), started their first seedling farms in the 1950s, and today plants almost 40 million trees per year. PotlatchDeltic (NASDAQ: PCH), a third U.S.-based timber REIT, also incorporates sustainable forest planting and plants ~21 million seedlings per year. These efforts aren’t limited to the U.S., as Canadian timberland owner West Fraser (NYSE: WFG) plants over 60 million trees per year and has planted over 1.8 billion trees since 1955. While we hope everyone plants a tree this Arbor Day, just remember some are doing it every day and on a much larger scale.