02/05/2024

The strength of the US economy may not allow the Federal Reserve to back off, and while Powell already made it clear at the press conference after the January 31 meeting, the employment numbers from last Friday have confirmed these expectations. Not only that: the strength of the labor market far exceeded even the most optimistic expectations. A total of 353,000 new jobs were created, almost twice the consensus forecast, while the figures for December were substantially revised. At the same time, the unemployment rate fell further, dropping from 3.74% to 3.66%, instead of the expected uptick to 3.80%. In addition, the average salary per hour worked was up 4.5% year-on-year, well above the 4.1% forecast by experts.

The bottom line of all these figures is that the highly anticipated slowdown of the American economy will have to wait, which increases the likelihood of an economic scenario that has been dubbed “No landing.” In this environment, the American economy would not end up losing strength, and could even gain steam in coming quarters. Naturally, this raises the question of whether the deflation of the last six months can continue.

In the short term, it's possible, given the large increase in productivity that was once again evident in the fourth quarter of 2023, the expected squeezing of profit margins and some additional improvement on the energy supply side. However, it's clear that the continuous convergence of inflation towards its target is now in jeopardy given the very strong internal demand.

Of course, the “No landing” economic scenario is positive for equity markets, since it paves the way for improved corporate profits. Along these lines, global stock markets rose for the fourth week in a row, closing with gains of 1% on average.

In the United States, the week was very turbulent, although the stock markets closed with increases of just over 1%. Investors had to deal with some negative earnings surprises, with new tensions involving regional banks and with Powell rejecting the possibility of a rate cut in March.

However, the solid American economic data and the good results of Amazon and Meta more than offset any previous uncertainty. The S&P 500, Dow Jones Industrial Average and the Nasdaq 100 all ended the week at all-time highs. In any case, the outlook for the Magnificent Seven no longer seems so secure. The thirteenth gain in 14 weeks for the Nasdaq 100 masked tremendously divergent reactions in the stocks of the tech heavyweights.

As for European equity markets, they also expanded their upward momentum in recent days, with the Eurostoxx 50 closing up for the second consecutive week, although January's inflation in the eurozone remained somewhat above consensus expectations.

After the publication of the surprising employment figures for January, the market consensus no longer expects the Fed to lower rates in March, which had been priced in with a very high degree of probability. The expectation now is for the first rate reduction to come in May, and for the return to normal to be slower than forecast. The Federal Reserve must no doubt consider its monetary policy options given the data available to it, and the amazing resilience shown by the US economy means that the first rate reduction may not be around the corner. In fact, the data currently available to the monetary authorities suggest that the economy is heating up.

Federal Reserve Chairman Jerome Powell has shown that in uncertain conditions, he prefers to act slowly when setting monetary policy. This means that if activity remains strong in coming weeks, the Fed will not lower interest rates in March.

This does not change our expectations for the 2024 fiscal year as a whole: the narrative of a soft economic landing remains the most likely, although the “No landing” scenario has recently gained strength, in which equities would presumably perform better than fixed-income assets.

In both scenarios, however, the two asset classes would perform well all during the year, so we don't see any reason to change the constructive position of our portfolios.