ClockWise: Could equity markets look through the ‘good news’ ?

Going into December, equities had sharply rebounded from October lows as investor sentiment recovered thanks to the ‘bad news’ of weaker growth and inflation data, raising hopes of early and deep rate cuts in 2024.

However, the US unemployment rate unexpectedly fell by 0.2% to 3.7% last week, despite relatively more downbeat messages coming from other labour market data (chart 1). This ‘good news’ has put the hope of early rate cuts into question ahead of this week’s central bank meetings.

Chart 1: US unemployment rate ticking lower despite softer labour market data elsewhere

Source: LSEG Datastream as at 15 October 2023. Past performance is not a guide to future performance.

Despite the risk of more hawkish than expected central bank messaging, we remain positive on equities and high yield for now. This ‘good news’ of labour markets resilience is likely to support consumer spending and therefore corporate earnings. At the same time, our ‘nominal growth’ indicator continues to soften, suggesting that demand for commodities may struggle (chart 2).

Chart 2: Commodities and Royal London Asset Management ‘growth plus inflation’ indicator as a proxy for nominal growth

Source: LSEG Datastream as at 8 December 2023. Past performance is not a guide to future performance.

If wage inflation can soften without job losses, lower commodities prices could act as another positive catalyst for equities, supporting the case for a ‘soft landing’.

However, we cannot rule out recession risk as lags of monetary policy tightening may be longer than expected. It’s also plausible that inflation proves sticker than expected, forcing central banks to keep rates elevated for much longer than priced into markets. It remains important to monitor developments in the business cycle.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.