Treading water?

Henry Adams

Chief Product Officer
Thursday, Mar, 14, 2024

One could say the market has been somewhat benign since my last musings. There are still significant milestones though worth highlighting.


In geopolitics, we saw Sweden’s flag raised at NATO HQ following their accession – the last of the Scandinavians to do so. Earlier this week we also saw Japan avoid a technical recession. The last of the negative interest rate club still standing, normalisation is good news along with the domestic stock market close to reaching record highs. In the case of Nippon it has been more than a handful of years, with the previous peak reached in December 1989. Almost ironic that Phil Collins’ “Another Day in Paradise” was number 1 in the charts. Japan’s main index, the Nikkei 225, charted below from 1970 to today.

Source: Bloomberg LLP


In the past month, stocks have traded sideways. Whilst earnings season has been mixed, it is definitely a story of those that have outperformed and the rest, as opposed to being driven by the interest rate landscape and expectation of markets past. Activity is up along with cautious optimism that we avoid deep slowdowns and at worst face a “technical” recession, which is about as painless as they come. M&A activity is 70% up on this time last year, and we have seen a return of the IPO.  Chatter of the peak and stretched valuations is being quashed by rate relief coming along with remaining below historic highs when comparing earnings multiples.

What has not gone away though, is those pesky real estate woes. New York Community Bank took another beating but has since been propped up by brave external investors. The good news there at least is that it does indeed remain an outlier with 57% of the book backed by commercial real estate, more than double the (significant) bank in second place being Citizens. Name ring a bell? They were the fifth US domestic bank to fail last year. Their books? Considerably smaller but with a similar asset mix to Wells Fargo, the third largest in the States (after JP Morgan and Bank of America). Anyway…I’m sure it will be fine!


Lending remains strong, markets liquid, and spreads thin. Versus the 12-month average, we are 0.20% below and comfortably near all-time tights. March has typically not been the best month for news. In recent times everything from a pandemic, tearing inflation, military invasion and bank collapse. That’s just in the last 4 years…
Are credit markets pricing perfection? Maybe. At least the cost to insure against default is also down so you can cover your risk. Only downside? Those selling insurance can often be highly correlated to those you’re insuring against.

Source: Bloomberg LLP


The ECB meeting last week was also fairly uneventful. The biggest news from the Bloc being progress made on breaking down barriers that currently exist between various nation states’ capital markets. Everything from securitisations to common rulebooks and EU-wide investment products are being pushed following a hiatus. The ECB is also looking to hold back on changing the existing subsidy of base rate to banks that extends to deposits beyond reserve requirements, for now at least. Whilst prudent to sustain profitability and stability, it does not encourage lending. Some voting members are calling for cuts before summer. For now though, the first cut, according to the market, is in June for a princely 25 basis points. Bets are for the year to end almost a full percentage point lower.


The Spring budget came and went, anything headline grabbing already printed the prior weekend. Apparently we’ll be paying less tax, but be worse off etc etc. Tuesday saw the latest employment data released and we are beginning to trend lower both in terms of level of employment and pace of wage increases. Unemployment now sits at a still extremely healthy 3.9% whilst average earnings growth  sits in the mid 5% or 6% depending on if you include bonuses.

According to the Office for Budget Responsibility (or OBR), inflation will continue to fall sharply and to below 2% in the coming months. Optimistic? Perhaps. Although their revision projected we would have actually been higher for longer. The below taken from their March update.

Source: Office for National Statistics

Also very interesting as a resident of this island is their additional prediction that real disposable income will actually also rise to the pre-pandemic peak in the next fiscal year. Let’s hope they are right on both counts…
As far as the market is concerned, the first cut to the base rate comes at the beginning of August with a grand total of 0.72% of easing prices in by Christmas.


Inflation remains elevated here too, driven by services as the Consumer Price Index (CPI) excluding food & energy came in above estimates at 3.8% whilst “gross” CPI also beat at 3.2%. That last percent may well be tricky to iron out. At this stage, should we just be saying it’s near enough and not self-destruct for the sake of a benchmark? Medium term estimates from the Federal Reserve put inflation between 2.7-2.9% which again remains above target although the economy continues to power ahead and workers are not just keeping their jobs but negotiating higher salaries much like the UK. The market remains torn between when the first 0.25% cut comes, currently dancing between June and July, with rates 0.85% lower by the end of the year from here.

Source: Reuters

So what?

Well, whilst it has felt as though we have been going nowhere for the last month, the geopolitical landscape continues to shift all while developed economies look to get their economic houses in order. Particularly important during this critical year for democracy, with so many going to the polls. Rhetoric continues to be for a landing that is soft or maybe even no landing at all. There are still reasons to be cautious and no matter what the rest of 2024 holds for us all, one thing seems certain. We will see 2024 out with base rates across core currencies lower.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.



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