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Market index returns
Week to date since February 7, 2024 as of February 14, 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.
Market commentary:
Global equities were on track for another solid week, hitting an all-time high on February 9th, before faltering on the release of U.S. Consumer Price Index (CPI) data and ending our review period in modestly positive territory. CPI data showed inflation continuing to slow, but not as fast as hoped, lowering expectations that the U.S. Federal Reserve (Fed) will start cutting rates this spring. Markets recovered a bit the following day and continued to climb after our review period as investors contemplated how better growth potential may benefit earnings. In the aftermath, all Real Assets classes ended our week in negative territory, with TIPS holding up the best with just minor losses. Global Real Estate and Commodities followed, with U.S. REITs holding up well while international property stocks struggled, and precious metals and natural gas weighed on Commodities. Natural Resource Equities and Global Infrastructure struggled a bit more, hampered by metals & mining names and wider concerns in the Asia Pacific region.
Why it matters: On the topic of inflation, we think that U.S. Treasury Secretary Janet Yellen said it best this week in that “it is a tremendous mistake to focus on minor fluctuations and to have failed to see the longer-term and bigger trends. And the trend here is that inflation is moving decisively down." We think investors may have been too hopeful that central banks would begin cutting rates as early as next month, despite central bank talking heads indicating that summer may be more appropriate. The U.S. economy continues to be resilient, but China’s economy is still struggling, and it was determined this week that both the UK and Japan were in recessions following the release of their 4Q GDPs. The situation in the Middle East remains tenuous, with Israel striking deep in Lebanon and planning a major offensive in the southern portion of the Gaza Strip while almost daily confrontations or strikes occur between the U.S. and Houthi rebels in the Red Sea area.
Macro Dive: This week we review the latest inflation data in the U.S., a disappointing retail sales report, and conclude with a broad overview of happenings in Japan.
Why it matters: On the topic of inflation, we think that U.S. Treasury Secretary Janet Yellen said it best this week in that “it is a tremendous mistake to focus on minor fluctuations and to have failed to see the longer-term and bigger trends. And the trend here is that inflation is moving decisively down." We think investors may have been too hopeful that central banks would begin cutting rates as early as next month, despite central bank talking heads indicating that summer may be more appropriate. The U.S. economy continues to be resilient, but China’s economy is still struggling, and it was determined this week that both the UK and Japan were in recessions following the release of their 4Q GDPs. The situation in the Middle East remains tenuous, with Israel striking deep in Lebanon and planning a major offensive in the southern portion of the Gaza Strip while almost daily confrontations or strikes occur between the U.S. and Houthi rebels in the Red Sea area.
Macro Dive: This week we review the latest inflation data in the U.S., a disappointing retail sales report, and conclude with a broad overview of happenings in Japan.
- Feeling hot, hot, hot: New inflation releases this week interrupted the disinflationary trend, as both CPI and Producer Price Index (PPI) data came in hotter than expected. First, headline CPI showed an increase of 0.3% month-on-month (ahead of 0.2% estimates and December’s downwardly revised 0.2%) and 3.1% year-on-year (ahead of 2.9% estimates but falling from December’s 3.4%), while core CPI (excluding volatile food and energy) rose 0.4% month-on-month (ahead of 0.3% estimates and December’s 0.3%) and 3.3% year-on-year (ahead of 3.7% estimates and in line with December’s 3.9%). In the wake of the release, the 10-year U.S. Treasury yield jumped almost 14 bps, closing above 4.3% for the first time since last November. The PPI release showed an even more concerning story, with all measures being reported above estimates and most accelerating from December’s pace. Following these releases, investor expectations for the first Fed rate cut were pushed further back, with the futures market indicating slim chances for a cut in March or April but with a ~97% chance of a June cut.
- Buyer’s remorse?: The first signs of potential consumer fatigue arrived as the U.S. Census Bureau reported retail sales for January that fell well below expectations. Following strong holiday spending through December, consumers pulled back in January, with month-on-month sales dropping by 0.8% versus expectations of just a 0.2% decline. Retail sales ex autos, ex autos and gas, and the control group were all expected to rise by 0.2% but fell -0.6%, -0.5%, and -0.4%, respectively. The hardest hit category sequentially was building materials and garden equipment, which fell 4.1% from December and 8.3% from the year ago period, while the most resilient was furniture and home furnishings, which increased 1.5% from December but is down almost 10% compared to January 2023. The mid-January polar vortex might be partially to blame, but the higher cost of consumer credit, the inflated cost of goods, the resumption of student loan payments, and the whittling down of pandemic-era savings are all likely contributing to the decline. While one month doesn’t make a trend, we will be watching closely next month to see if consumer spending rebounds or falls further, as retail sales for February will be reported just a week before the Fed’s meeting in March.
- Land of the Rising Stocks: First, the good news for Japan; the Nikkei 225, its main stock market gauge, hit its highest point in over 34 years, surpassing levels not seen since January 1990. Strong performance from the tech sector on artificial intelligence (AI) optimism has been one of the driving factors. One of the other factors (which might be considered bad) is a severely weakened currency, as the yen crossed the important 150 threshold to the U.S. dollar, helping Japan’s export activity but also nearing a level where we have seen intervention from the Bank of Japan (BOJ) in the past. In the category of ugly, we would point to Japan’s 4Q GDP print of -0.4%, which missed expectations of a 1.1% expansion, and a 3Q print that was downwardly revised by 40 bps to -3.3%, which together indicate Japan is in a recession and has lost its status as the world’s 3rd largest economy. This economic contraction is likely giving the BOJ a headache, as it was widely believed to be heading towards its first policy rate hike since 2007. While a rate hike would help strengthen the yen, it could prove counterproductive to reinvigorating their economy.
Real Assets, Real Insights: Below, we’ll look at the latest developments from telecom companies in their support of first responders and how it benefits the tower sector, review the continuing consolidation in the oil & gas space with another M&A deal announced this week, and finally, with Valentine’s Day occurring this week, we’ll give our thoughts on the price of chocolates.
- Nothing but Net for the towers (Infrastructure): This week, AT&T and the First Responder Network Authority (FirstNet) announced the next stage of investments in the U.S.’s dedicated public safety wireless network. AT&T already has the exclusive deal to build out FirstNet, which is a nationwide priority broadband network specifically for first responders. In 2017, when AT&T won the FirstNet contract, it was estimated they would spend $40B on the network over the life of the 25-year deal, and they recently released plans to spend the next $8B over the next 10 years to upgrade the network from 4G LTE to a 5G standalone core. Tower operators will not only benefit from the buildout of 1,000 new cell sites in this stage but also from fees or lease modifications on existing towers that may see upgrades. Furthermore, the tower companies also stand to benefit from the continued buildout of competing priority programs for first responders, such as Verizon’s Frontline and T-Mobile’s Wireless Priority Service.
- Oil company sinks FANGs further into the Permian (Natural Resources): Following in the footsteps of Chevron’s announced acquisition of Hess and ExxonMobil’s announced merger with Pioneer Natural Resources, more consolidation in the oil and gas space is likely to occur with Diamondback Energy (NASDAQ: FANG) announcing its intent to merge with Endeavor Energy Resources. Diamondback announced this week it would buy privately held Endeavor for $26B in a cash-and-stock deal that would create the third largest (behind ExxonMobil and Chevron) oil and gas producer in the Permian Basin—the highest producing oil field in the U.S. located in West Texas and parts of New Mexico. While Diamondback is hoping to close the deal before the end of the year, the Federal Trade Commission (FTC) may have something to say (or rather questions to ask) as they are closely scrutinizing the prior two deals. Even though a combined Diamondback-Endeavor entity would be the largest company focused exclusively on the Permian Basin itself, it would control less than 30% of oil production in the broader region, which has generally been the level where the FTC sees threats to fair competition.
- Maybe just flowers and a card this year (Commodities): When considering what to get your significant other for Valentine’s Day, it might make sense to look at the current price of chocolate first. Cocoa, one of the primary ingredients in chocolate, has seen its price more than double over the past four months, soaring past records last set in the 1970s and reaching an all-time high. The key driver for the recent price surge has been extreme weather in West Africa, which accounts for much of the global supply, with the Ivory Coast and Ghana accounting for ~60% of global production. While the region saw heavy rains earlier that led to the spread of crop disease and delayed harvesting, it has now been followed by a seasonal dry spell with mild Harmattan wind conditions, which could further impact production and lead to even tighter supply. This season will mark the third year of shortfalls, and the market is estimated to see a deficit of ~0.5M tons, which is nearly 10% of the global market size. On the other hand, wood pulp, the main ingredient in the papermaking process, has seen prices ease over the past year, though we have yet to find a card maker willing to pass those savings on to you.
