Markets Wrap (2H March)
Market is convinced - ECB will start trimming in June
In the last month markets haven't moved much in terms of rate expectations for the euro zone. The market is still almost 100% certain that rates will be lowered at or before ECB's June meeting. End-2024 market implied rate change is also steady at -0,9%. At least so far ECB's president Christine Legarde has also hinted that rate cuts are feasible during this quarter. Favorable inflation data has also helped, as during March headline inflation receded to 2,4% from 2,6% in February. However, the ECB is now putting more emphasis on wage growth moderation. Negotiated wages as of 4Q 2023 stand at 4,5%, while the ECB wants to see this number receding closer to 3%. Signs of slowing wage growth due end-April would help ECB's mission of price stability.
Manufacturing is still a headache for euro zone. While the global manufacturing is again showing signs of expansion, euro zone manufacturing PMI is still well below the 50 point mark and even receded last month. The saving grace for the euro zone is still the services sector, its PMI has been above the level of 50 for two months now.
Three cuts no longer a certainty for the US
In the last Federal Open Market Committee meeting the decision makers have reiterated their outlook, that 0,75% of rate cuts for 2024 is the most probable scenario. However, with recent more hawkish comments from Fed president Jerome Powell investors are becoming more wary. It seems that ever since end-last year the market was expecting a far more dovish Fed than it signaled itself. Now the roles reversed, with market expectations for only 0,7% of cuts for this year (Figure 3).
Further, both the labor market and the economy are still running at a pace as if policy rates are irrelevant. The latest "Jobs and Labor Turnover Survey" is showing job vacancies stabilizing at levels far above anything seen prior to the pandemic. Combined with the unemployment rate still below 4%, the American labor market is still a heaven for the jobseeker.
Large caps leading equities as small caps play catch-up
The first quarter of the year has been great for both US and European equities as both markets have gained around 8-10% YTD. This has been the best start of the year for stocks since 1Q 2019. However, it should be noted that the outstanding growth was mostly attributable to large capitalization stocks, while smaller stocks have grown at half-speed at around 4%.
Dropping solar manufacturing prices and record supply
Prices of crystalline silicon modules (dominating solar PV market with 95% share) have stabilized at all time low levels of USD 0,11/W. However, even at record low module prices, the volume of Chinese solar exports in January and February set a new record. In total, IEA forecasts that solar panel output will reach 1,100 GW at the end of 2024 - three times more than demand. With China in control of ~90% of solar PV supply it will be even harder for outside producers to compete in the oversaturated solar market.
