Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is chief market strategist at JefferiesThere is plenty of healthy debate out there on the outlook for Federal Reserve rate cuts during 2024. And to be sure, you can find just about any forecast you like from the standard pool of professional pundits.Typical examples run something like this: “They will cut rates every meeting starting in March”, or “they will cut every other meeting starting in May”, or “they will cut only twice, starting in September”, or “they will . . . blah blah blah.” But the differences in these rate forecasts do not translate into meaningful changes for the risk asset outlook. For me, the most important part of a Fed policy forecast in 2024 does not involve using the deceptively hubristic word will; rather, it focuses squarely on the far more humble can. Here is my version of the outlook for monetary policy in 2024: The Fed can cut quickly and the Fed can expand the balance sheet aggressively, if things get messy. That has huge ramifications for the performance of riskier assets such as equities. Specifically, it implies that the Fed put structure — the idea that the central bank will intervene to support markets and economies in times of turmoil — is back in place.To be frank, a forecast of what they will do is only meaningful for a bunch of leveraged short-rate-focused hedge fund traders who play meeting-to-meeting odds. But a forecast of what they can do affects regular folks, those who are just looking at the medium- to long-run performance of credit and equity assets. The critical change for Fed policy in 2024 centres around the Fed’s renewed ability to be a backstop for market and economic stresses. Any finger-to-the wind prediction of what they ostensibly will do, given some dubious assessment of recession risks, has no value in my world. Now remember, for the past two years the Fed put has been largely unavailable to us investors in times of stress. It was only in late 2024, when Fed chair Jay Powell finally signalled that the employment side of the dual mandate was returning to an equal weighting relative to the inflation side, that we got our put back. And there is no doubt that risk assets have dearly missed this put. When the S&P 500 index dropped from 4,800 to 3,600 in 2022, did the put get exercised? No! Powell just kept telling us that we had to take the pain while he fought back the revival of those inflation demons from the 1970s. And even in 2023, when so many were calling for rate cuts because of some half-baked prediction of impending economic doom, Powell just kept increasing them.The real story for 2024 is what the Fed can do. Powell can once again provide a market and economic backstop. I have no idea how many times the Fed will cut, when it will start or how far they go on its quantitative tightening programme to reduce its balance sheet. All I know is that Powell now has my back in times of stress, given his victory in the battle against the great supply-side inflation shock of 2021-22.With that said, it is important to recognise that the put structure has evolved substantially. Under the past model, if things got messy, central banks cut. Then, if rates hit the effective lower bound, quantitative easing started. Further, if there were severe pockets of financial market stress, they introduced balance sheet funding facilities into the backstop, with inelegant acronyms such as the CPFF, AMLF, TAF, TALF, PDCF, and so on. In our two past major rate-cutting cycles, during the financial crisis and the Covid-19 pandemic, both QE and funding facilities only came into play once rates hit zero. But over the past 18 months, we have seen funding facility put structures introduced when rates were not at zero. The European Central Bank started this trend when it created the transmission protection instrument for bond buying; the Bank of England followed with its gilt purchase programme; and, finally, the Fed introduced the bank term funding programme after the collapse of Silicon Valley Bank. When it looked as if policy was beginning to bite too hard in certain sectors, funding facilities came into play. Adding liquidity in one sector while subtracting it in others has now become a critical feature of the central bank backstop. And it has created enormous flexibility.In fact, one could argue that the overall power of this fully loaded global central bank put structure has never been greater. Policymakers can now provide targeted liquidity to weak links in the financial markets, even while sticking with a restrictive overall stance designed to anchor long-run inflation expectations. In sum, the put is not just back in 2024, it is stronger and more flexible than ever. Good luck trading.   More

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NEW YORK (Reuters) – As the S&P 500 continues to hit fresh milestones with a first-ever break above the 5,000 level, its valuation is reaching new heights as well. The S&P 500’s forward price-to-earnings ratio — a commonly used metric to value stocks — this week rose to 20.4 times, a level last reached in February 2022, according to LSEG Datastream. That puts it far above the index’s historic average of 15.7.It isn’t unusual for valuations to climb along with stock prices, and equities can stay expensive for a long time before returning to more moderate levels. Still, some investors believe the index’s growing multiple has made buying into the broad market a less enticing proposition. The S&P 500 has surged 21% since late October, making new record highs along the way.It briefly crossed the 5,000 level at the end of Thursday’s session, before closing just below the mark.”There is nothing screaming from the rooftops that at 20 times you have to sell,” said Mark Hackett, chief of investment research at Nationwide. “It’s just you’d obviously rather buy at 15 times.”Stock valuations have risen even as Treasury yields have rebounded this year, following a rethink of how soon the U.S. Federal Reserve will begin cutting interest ratesHigher yields tend to pressure equity valuations as it means bonds are offering more investment competition to stocks and that future company cash flows are valued less highly. That means stock valuations could rise further if the Fed delivers its widely expected cuts and yields fall. The 10-year Treasury yield was last around 4.16%.And while a more optimistic earnings outlook would help make valuations less expensive, profit expectations for 2024 have largely stayed stable this earnings season as companies have reported results. S&P 500 companies are expected to increase earnings by 9.7% this year, LSEG data showed.Peter Tuz, president of Chase Investment Counsel, has been looking this reporting season for companies with solid earnings prospects that are not expensive.The S&P 500’s “valuation at roughly 20 times … is somewhat excessive and is based on either earnings growth or falling rates that we might not see until the latter parts of this year,” he said. High valuations have preceded periods of subpar performance in the past, according to research from Evercore ISI. The S&P 500 has been flat on average over the next year when it traded at its current valuation of 22 times its trailing twelve month earnings, wrote Julian Emanuel, a senior managing director at the firm, in a Wednesday note analyzing data going back to 1960.”The good news is that valuations, while stretched … are nowhere near the 28x peak at the Y2K Bubble Top,” Emanuel said.To be sure, the S&P 500’s valuation is skewed by the heavy weighting of the index’s largest stocks. The so-called Magnificent Seven group of megacap stocks – which includes Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA) – have a combined weighting of 29% in the index and trade at an average of 34 times earnings, according to LSEG Datastream data. At the same time, there have been fewer signs of the speculative excesses that marked past market turning points, such as the dot-com era and the wild post-pandemic rally that brought eye-watering gains in so-called meme stocks such as GameStop (NYSE:GME).An analysis by Ned Davis Research showed that the S&P 500 is more than 5% “overvalued,” when adjusted for how the index’s P/E ratio has trended since 1964. However, the index is “far from bubble territory,” the firm said. More

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(Reuters) – A look at the day ahead in Asian markets.Trading volumes across Asia will be lighter than usual on Friday as investors unwind for Chinese New Year and other regional holidays, with Chinese credit and lending figures potentially being the main market-moving events.The Australian dollar could move on Reserve Bank of Australia Governor Michele Bullock’s testimony to parliament, although she might have to go beyond what she said on Tuesday after interest rates were kept on hold at a 12-year high of 4.35%.Investors will look to wrap up the week on a positive note – barring a decline of 0.7% or more on Friday, the MSCI Asia ex-Japan equity index will rack up its third weekly gain in a row for the first time since June last year. Japan’s Nikkei jumped 2% on Thursday and is back within touching distance of a new 34-year high. The S&P 500 on Friday hit the 5000-point level for the first time, even though bond yields rose and another Fed official urged patience on rate cut expectations – the timing of the Fed’s first move is slowly moving towards June from May. The Asian economic calendar on Friday is light. There are no major data releases scheduled, although there is a chance Beijing could release January’s credit and lending figures.Chinese stocks go into the holiday season on a much stronger footing than they were a week ago. They have jumped 5% this week, chalking up their best week in over a year on optimism surrounding Beijing’s efforts to support asset prices. But it may just be a short-term bounce based more on stretched positioning and over-sold momentum indicators than a deeper-rooted improvement in economic or market fundamentals.China bears will point out that the rebound is coming from a low base – a five-year low, to be precise – and only a week ago the main indices had slumped as much as 6%. Prices are back to where they were only a few sessions ago. And speaking of economic fundamentals, the latest inflation figures from Beijing on Thursday suggest a definitive improvement remains some way off. Consumer prices in January fell 0.8%, the fastest pace since 2009 and well below the 0.5% decline economists had expected. This is bound to ramp up the pressure on policymakers to do more to revive an economy low on confidence and fend off the intensifying forces of deflation.If this week’s market reaction is any indication, investors are betting that authorities will bow to that pressure. Here are key developments that could provide more direction to markets on Friday: – RBA Governor Bullock testifies to parliament- China lending, credit (January *possible)- Germany inflation (January, final) (By Jamie McGeever) More

HAVANA (Reuters) – Western Union (NYSE:WU) confirmed on Thursday it had temporarily suspended remittances from the United States to Cuba more than a week ago, blaming what it described as technical issues with processing transactions there.Western Union said its services had been disrupted since Jan. 28. Several other companies which offer similar services have also reported outages in recent days, paralyzing a lifeline for Cubans suffering through the worst economic crisis in decades. Cuba’s state-run Banco Metropolitano and Fincimex have also reported outages.”The technical issues exist with the processing of transactions on the island,” a Western Union spokesperson said in an email. “Western Union operations are stable, hence this being an isolated issue with money transfers sent from the US to Cuba only.”Cuban officials did not immediately respond to a request for comment on the outage.The administration of Cuban president Miguel Diaz-Canel reported a cyberattack on Jan. 31, which it said had led it to put off a five-fold increase in gasoline prices planned for Feb. 1. Officials have not discussed a link between the reported cyberattack and remittance processing.Western Union, among the world’s top providers of money transfer services, resumed remittances to the communist-run island in 2023, nearly three years after the Trump administration put in place sanctions that had triggered a halt in service.Remittances have long been a crucial source of income for Cuban families, but the need has become even more acute of late amid a severe economic crisis resulting from tighter U.S. sanctions, the coronavirus pandemic and floundering tourism.Studies show that almost 70% of the Cuban population receives remittances in varying forms, according to a 2023 Economic Commission for Latin America and the Caribbean (ECLAC)report, though there are no official figures available from the Cuban government.The Western Union spokesperson told Reuters the company was seeking to contact customers who have had transactions impacted. More

The House of Representatives’ select committee on China, led by Republican Congressman Mike Gallagher, released the report, which also scrutinizes investments made by GGV Capital, GSR Ventures and Walden International in Chinese artificial intelligence and semiconductor firms with unsavory ties.Reuters could not immediately reach the venture capital firms for comment. The Committee called on the Biden administration to restrict U.S. investment in Chinese firms sanctioned by the U.S. government over ties to China’s military or it repression of minorities and urged it to bolster recent U.S. curbs on U.S. investment in China to include more sectors. “The status quo is untenable… Decades of investment—including funding, knowledge transfer, and other intangible benefits—from U.S. VCs have helped build and strengthen the PRC’s (People’s Republic of China) priority sectors,” the report said. The White House and the Chinese Embassy in Washington did not immediately respond to requests for comment. More

“I do expect that before the end of the year it will be appropriate for us to carefully begin easing rates,” Collins said in an interview with Sirius XM (NASDAQ:SIRI), saying she is optimistic on inflation’s progress but realistic about the risk it could stall out because of strong economic growth. “We are going to need growth to slow, and I am looking for an orderly slowdown” that is also equitable, she said. Fed policymaker projections published in December show most U.S. central banks see the policy rate, now at 5.25%-5.5%, ending 2024 in the 4.5%-4.75% range or below, with the median expectation for three 25 basis-point rate cuts. “My baseline is similar” Collins said, adding that policy is not on a preset path and that the Fed will need to adjust based on the data. As for when rate cuts could start, she said, “I will need more, additional evidence” to confirm inflation is trending toward the Fed’s 2% goal, though delaying cuts until the 12-month rate hits that goal “would be waiting too long.” Inflation by the Fed’s targeted measure, the year-over-year change in the personal consumption expenditures price index, was 2.6% in December, the latest figure available, less than half its pace in January 2023. On a 7-month annualized basis it is at 2%. More