Markets swing between hope and fear as they await rate cuts

SINGAPORE – Markets continued see-sawing between hope and fear amid the realisation that the expected slew of multiple rate cuts may not materialise, no thanks to sticky inflation numbers.

However, Wall Street stocks surged on May 31 after personal consumption expenditure (PCE) data – the

US Federal Reserve’s preferred gauge of inflation

– came in within the expected range.

The recovery on May 31 saw the Dow Jones pare its losses for the week to 0.98 per cent at 38,686.32 points. Meanwhile, the S&P 500, which had been weighed down by uninspiring earnings by the likes of tech services players like Salesforce, trimmed its weekly loss to 0.51 per cent at 5,277.51 points. The tech-heavy Nasdaq lost 1.1 per cent to 16,735.02 points.

In Singapore, the Straits Times Index gained 1.3 per cent last week to 3,336.59, with dividends boosting the total return to 2.6 per cent. This brings the total return over the past five months to 5.8 per cent.

The standout counter for the week was airport services company

Sats, which surprised the market with a stronger-than-expected financial year 2024 headline net profit

of $56.4 million and declared a dividend of 1.5 cents last week. Operating cash flow rose from $79.6 million to $512.1 million for the year ended March 31, 2024.

Though small by its previous standards, the resumption of dividend payments was seen by the market as symbolic of a recovery by the company, which has been weighed down by integration costs arising from its purchase of larger global rival Worldwide Flight Services. Analysts have upgraded the stock, with 12-month price targets ranging from $3.22 to $3.44 based on the company’s improving outlook.

Overall market sentiment remains somewhat fragile as US and global inflation numbers remain sticky on the downside.

In the US, the weak response to the US$148 billion (S$200 billion) bond auction on May 29 heightened worries that funding the massive and growing US deficit will drive up yields at a time when the Fed is in no rush to cut rates.

The US budget deficit clocked in at US$1.7 trillion in fiscal year 2023, up from US$1.38 trillion in 2022. This annual shortfall is expected to keep growing, reaching US$2.6 trillion by 2034. As at the end of 2023, the deficit equalled 6.3 per cent of gross domestic product, a level untouched for six decades until the 2008 global financial crash.

Why is this important?

Each deficit adds to an already mammoth amount of publicly held debt, which stood at US$27.6 trillion as at April 1, nearly the size of the US economy. This is worrisome because it causes a phenomenon which economists call “fiscal dominance”, where the government debt and deficit spending undercuts and negates the Federal Reserve’s attempts to rein in inflation.

The US Government Accountability Office in February 2024 warned that this unsustainable long-term fiscal path poses economic, social and security challenges to the US if not addressed. It urged Congress and the US administration to make difficult budgetary and policy decisions to address the key drivers of debt and change the government’s fiscal path.

With the US heading into presidential elections, the hope for this remains just that – hope.

Despite his conviction in the hush money trial last week, former president Donald Trump still remains the favourite to win the White House race in November. But market veterans like Mr Bill Gross, former head of Pimco, reckon a Trump presidency will be bad for markets and the economy as his tax cut and spending policies would raise further debt levels.

That said, there are some encouraging signs for the market.

April’s PCE, which strips out the volatile food and energy components, increased just 0.2 per cent from the prior month, which was the smallest advance for the year. Inflation-adjusted consumer spending unexpectedly fell 0.1 per cent, dragged down by a decrease in outlays for goods and softer services spending as wage growth, the primary fuel for demand, moderated.

The April spending figures add to evidence that the US economy is poised to slow down, offering Fed officials a pathway to consider rate cuts during the second half. Meanwhile, the US 10-year yields pulled below the psychological 4.5 per cent mark on May 31.

Still, we expect the Fed to stay on hold at the June meeting as it awaits additional data that can boost its confidence that inflation will cool further. Fed funds futures trading data currently suggests a nearly 54 per cent chance that rates will hold steady in September, according to the CME FedWatch Tool.

At the moment, market experts and insiders are still holding out for two 25 basis point cuts in the Fed funds rates in 2024, a far cry from the four cuts they expected in February.

Market experts advise investors to brace themselves for a bumpy ride on risk assets for a few more months until there is greater clarity about US inflation and monetary policy.

“Those hoping for clarity and conviction on how markets will do in the short term are unlikely to get any answers any time soon, as inflation-related data and Fed rhetoric could remain volatile, causing intermittent market turbulence,” said Mr Vasu Menon, managing director for investment strategy at OCBC Bank.

This week features the latest macro sentiment indexes of China and Japan, the interest rate decision of the euro zone, and US labour market data.

On June 3, China will release its May Caixin manufacturing purchasing managers’ index (PMI). The market expects a slight 0.2 percentage point uptick to 51.6. The US will also release the Institute for Supply Management (ISM) Manufacturing Index for May, with the market expecting a 0.5 percentage point uptick to 49.7 from 49.2 in the prior month.

On June 4, the US will release its monthly factory orders growth. Markets expect a moderation to 0.7 per cent in April, from 1.6 per cent in the prior month.

On June 5, we will see the release of China’s Caixin Services PMI where the market expects a slight 0.1 percentage point uptick to 52.5. The euro zone will release its May producer price index (PPI) inflation to reveal the latest price pressures in the economy. The US will also release the ISM Services Index where the market anticipates an uptick to 51 in May, from 49.4 in April.

On June 6, the euro zone will release its retail sales growth figure for April. The European Central Bank will also announce its policy rate decision on that day.

On June 7, China will report its May merchandise trade figures. Japan will make the preliminary release of its Leading Index and Coincident Index for the month of April. The US will release its May employment figures, in which the market expects non-farm payroll to rise by 180,000 versus 175,000 in April, and the unemployment rate is expected to remain unchanged at 3.9 per cent.

In Singapore, the two key data releases this week will be the May PMI index on June 3 and April retail sales on June 5.

The market will continue to swing between hope and fear amid these dataflows.