Signal over noise with Ulrike Hoffmann-Burchardi
The desk interprets the recent insights from Ulrike Hoffmann-Burchardi of UBS, focusing on solid macroeconomic data in the U.S. which could influence the Federal Reserve's decisions regarding rate cuts. This week’s key economic indicators, particularly labor market data, are crucial as stronger employment outcomes may lead to a more favorable rate outlook, diminishing the likelihood of the three cuts currently priced in. Per the full note source, the desk acknowledges potential volatility in equities due to rate path uncertainties but maintains that higher real rates may not prevent further equity gains. Additionally, the emerging analog between current market conditions and those of 1999, spotlighted by the correlation between equities and Bitcoin, highlights the need for traders to monitor these dynamics closely for further market digestion.
What the desk is arguing
The desk emphasizes the significance of positive macroeconomic indicators, noting that recent GDP growth, housing starts, and PMIs exceeded expectations, which could lead to a recalibration of interest rate expectations by the Fed. Per the full note source, this could suggest fewer cuts than the market currently anticipates.
Such developments could imply a choppier trading environment for equities, with higher real interest rates being a primary headwind. Yet, the desk believes that equities can still rise, a sentiment bolstered by recent corporate investments in transformative technologies, likening current conditions to those of the late 1990s.
Where it sits in our coverage
While there is no direct coverage data on currency pairs, the context in Ullrike Hoffmann-Burchardi's commentary could have implications for USD-related trading strategies, given the anticipated impacts on interest rate decisions. The desk's interpretation aligns with our broader market expectations, which suggest a cautious but optimistic outlook for equity returns.
How other firms see it
Several firms, including jpmorgan and others, seem to echo the desk’s bullish stance towards equities based on positive macro data. On the contrary, firms like bofa express a more bearish outlook, potentially downplaying the sustainability of equity growth in light of higher real rates.
As markets digest this evolving narrative, investors should keep an eye on equity market movements and how they intersect with anticipated Fed actions, particularly in sectors impacted by technological investments and shifts in consumer confidence.
What the calendar says
No significant high-impact events are scheduled in the upcoming weeks that could disrupt the current market dynamics, allowing traders to focus on macroeconomic signals and corporate earnings in their strategic decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Strong macro data may reduce 2024 Fed rate cuts expectation.
- 02Real rates could present short-term volatility but are unlikely to derail equity gains.
- 03Historical parallels to 1999 suggest potential for further investment in tech.
- 04Bitcoin's decline could affect investor sentiment towards riskier assets.
Market implications
Markets will be watching the labor market data closely this week as a harbinger of Fed policy adjustments. If stronger-than-expected employment data emerges, it could bolster the USD and dampen risk appetite across equities, inversely affecting crypto markets as well.
Risks to this view
A significant catalyst that could reverse the current bullish outlook would be a disappointing employment report, leading to a reassessment of Fed rate cuts. Additionally, any indication of persistent inflationary pressures could provoke a more hawkish response from the central bank, altering market expectations dramatically.
Hello and welcome to Signal over Noise. I'm Ulrike Hofmann-Borchati, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Let me start with what I see as signal and what I see as noise over the last week and then talk about what matters this week.
On the macro side, we saw solid macroeconomic data last week. Housing starts, GDP and PMIs all came in better than expected. That's important because if we get better economic data, the Fed may indeed cut less than the three cuts that are currently priced in by July next year.
The key market question is then, will equities still go up in this case? We think so, even though the rate path uncertainty may make things a bit choppier in the short term. It's higher real rates that equities struggle with and we expect real rates to stay range-bound.
An emerging signal to watch is the market's rhyme with 99, which became louder last week. In both cases, we have transformational innovation. Back then, in February 1999, Fed share greenspan called equity prices high enough to raise questions about whether shares are overvalued.
Now, last Tuesday, Fed share Powell said that U.S. equity prices are fairly highly valued. Back then, vendor financing of companies like Lucent and Motorola helped drive the revenue growth for 3G equipment. Now, last Monday, NVIDIA announced a multi-stage $100 billion strategic investment into open AI.
The investment is tied to GPU purchases to build a 10-gigawatt data center. Both of these were not signs of a market peak back then and are likely not now. But it does mean that we should stay attuned to this analog.
Not a signal by itself, but interesting, is that Bitcoin has been down over the last month while equities and gold have been strong. Bitcoin and equities have been strongly correlated over the last five years, both acting as a parameter for risk appetite. And a downdraft in Bitcoin could signal more digestion for equities in the short term.
Other news in the non-signal category was Fed share Powell's speech last week. He echoed the same stance as in the press conference the week prior. Similarly, Friday's headline on 100% farmer tariffs, effective this Wednesday, follows the same spend-to-spare tariff playbook that we have seen before.
Invest in the U.S. and be exempt. Neither had real bite in the market. What matters this week will be non-farm payroll on Friday.
Sources & References
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