Global equity indices are fairly steady as we move through the middle of the week. The FTSE 100 is an underperformer and is currently lower by 0.75%. In the FX space, the dollar is the best performer in the G10, as a little bit of risk aversion takes hold of market sentiment, as traders wait for the all-important core PCE report that is scheduled for release on Thursday.
US economic growth in Q4 was revised down a notch on Wednesday, GDP came in at 3.2%. Personal consumption was revised higher to 3% from 2.8%, and the GDP price index – which is an indicator of inflation last quarter – was revised higher for the headline and core measures, although they were only revised higher by a notch. Based on this data, the US consumer looks strong, and inflation is hovering around the Fed’s target rate. This is the second reading of GDP and there is one more release to go, but so far it looks like a soft landing has already happened for the US economy. But, far from make life easy for the Fed, it actually makes it harder, as this data doesn’t give a clear signal about when the Fed should cut rates.
Economic data mixed as we wait for US PCE data
It is also worth noting that GDP is backward looking data, and the Fed will be watching more timely indicators from 2024 before it decides policy. The economic data this week has been mixed so far. Durable goods orders were weaker than expected, confidence indicators also slipped considerably. The Conference Board consumer confidence indicator for February fell to its lowest level since November, and there were declines for both the present situation index and the expectations index. Sometimes respondents are not always the most accurate gauge of consumer trends as they can err on the cautious side, however, this data suggests that the pace of consumption could slow from here, which may threaten US GDP growth in the future.
Interestingly, regional manufacturing surveys in the US have picked up in February, suggesting that we could see manufacturing recover at the same time as the service sector slows. Even if this does happen, the manufacturing sector is not big enough to carry any slack in the service sector of the economy, but it could help to cushion any blow if a slowdown is on the horizon.
US Q1 GDP expected to remain strong
The Citi economic surprise index has turned lower in recent days, suggesting that US economic data is surprising on the downside as we move through Q1. This is a trend that we will be watching closely. The Atlanta Fed GDP now tool, which forecasts US economic growth, is predicting Q1 GDP to come in at 3.2%, which is higher than last week’s forecast of 2.9%. Thus, while it is tempting to react to every individual piece of economic data, it is better to look at the economic condition more broadly. If the US economy is growing at a 3.2% rate, this is fast, and is unlikely to be compatible with Fed rate cuts in the first half of the year.
Consumer discretionary vs consumer staples
One sign of economic strength in the US is the outperformance of the consumer discretionary sector in the S&P 500 vs. the consumer staples sector. This means that the US consumer is happy to spend money on non-essential items, rather than just staples, which is a sign of a healthy and confident consumer. As you can see in the chart below, the consumer discretionary sector has surged this year, and is one of the best performing sectors on the S&P 500, compared to the consumer staples sector, which is moving higher, but at a much slower pace. Below we will mention that investor enthusiasm about the US consumer has led to the consumer discretionary sector looking overbought, however, this does not mean that investors will automatically sell this sector or lose faith in the consumer. Instead, it suggests that we are still at the peak for the US consumer, and their contribution to GDP growth may continue to grow.
Chart: S&P 500 consumer discretionary sector (white), and consumer staples sector (orange)
Source: XTB and Bloomberg
S&P 500: Revenue and earnings expectations could drive stocks
Later on Wednesday we get a raft of Fed speakers, including Bostic, Collins and Williams. There comments will be parsed to see what they mean for the future direction of monetary policy, but will they move financial markets? The focus has shifted from monetary policy expectations and economic data to earnings data, and the earnings reports have delivered. The earnings growth rate for companies in the S&P 500 is expected to be 3.2% for Q4, which is the second consecutive quarter of YoY earnings growth. The growth rate for revenue in Q4 is expected to be 4%, which is the 13th consecutive quarter of revenue growth and the second longest period of consecutive quarters of revenue growth since 2008. Revenue growth is also expected expand in each quarter of 2024. The Q1 revenue growth rate is expected to be 3.5%, by Q4 revenue growth is expected to be 5.7%. Revenues are expected to strengthen as the year progresses, and if these predictions are true then it would break the current record of the longest streak for consecutive quarters of revenue growth.
S&P 500 not overbought yet, but getting close
This data all supports the rally in stocks that have pushed the S&P 500 to a record high. Interestingly, the S&P 500 12-month forward P/E ratio is currently at 20.4, below its all time high of 24.4 that was reached in July 1999. This suggests that the overall S&P 500 is not yet overbought and supports another leg higher in this current rally.
However, it is worth noting that the tech sector is already above its 25-year average forward P/E ratio, alongside materials and consumer discretionary. The fact that materials and consumer discretionary stocks are performing well, is a sign of economic strength, which is good news for stocks. However, this also means that fewer sectors are looking like they are good value at this stage, and this could lead to slower gains for the main US index from here. The technical analysis also suggests that the S&P 500 is hovering close to overbought levels, the relative strength index is just under 70, which is the threshold for an index being overbought. The equal weighted S&P 500 has an RSI of 62, which suggests that the equal weighted index is less overbought that the market-cap weighted index.
Thus, PCE may not be the big driver of markets this week, and unexpected drivers could impact financial markets, especially in the US.
Bitcoin surges passed key $60,000 level
Finally, Bitcoin is up for a fifth straight day and has breached the key $60,000 level, after rising more than $3700 on Wednesday. Bitcoin is up 40% so far this year, and this is its highest level since November 2021. The driver of crypto gains, which includes upward pressure on smaller coins, is the ‘halving’ that will take place in the coming months. This halving means that the amount of bitcoin created will halve, an event that happens every 4 years. This is a quirk within the formula that governs Bitcoin mining, and during previous halvings, the price of Bitcoin has tended to surge to records. Bitcoin’s issuance is limited, and this is driving demand. The fact that the halving has happened at the same time as the ETF has attracted $6bn of inflows, some from institutions, is adding to the upward pressure on crypto this quarter. The last three halvings have seen large gains for Bitcoin in the following 12-months. It is not clear if the same will happen after this halving, but Bitcoin is worth watching. As is MicroStrategy, the largest corporate holder of Bitcoin, and seen as a good corporate proxy for the direction of the biggest crypto coin.