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- Real Assets & broader market flat ahead of Fed meeting
Market index returns
Week to date since September 04, 2024 as of September 11, 2024
Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.
Market commentary:
Global equities declined early in our review period on weak U.S. payroll data but recovered in the following days to end flat for the week. The struggle to find clarity is due to the market being pulled in different directions, with a weak outlook from bank stocks on one hand but still high hopes for artificial intelligence productivity gains on the other. Throw in a U.S. presidential candidate debate that left more questions than answers and a U.S. Federal Reserve (Fed) meeting next week that could give an indication of just how aggressive rate cuts will be, and markets appear to be in a wait and see mode. Inflation in the U.S. and Europe seems to be on the correct path towards central bank targets, but economic growth in Europe (more specifically German industrial production) is being weighed down by China. Contrarily, the U.S. economy continues to defy expectations, with the latest GDPNow forecast from the Federal Reserve Bank of Atlanta predicting 2.5% growth in the third quarter, up about 0.4% in the past week.[1]
Against this backdrop, Real Assets saw flat returns overall this week, as did the broader equity market. Within Real Assets, Global Real Estate Securities saw positive returns, besting the broader market with strength seen in U.S. Data Centers and Asia ex Japan real estate names. Treasury Inflation-Protected securities (TIPS) also saw positive returns this week. Global Infrastructure securities were flat, in line with the broader market, while Commodities declined, and Natural Resource equities fell more as energy commodities and producers saw weakness.[2]
Why it matters: It feels like the end of 2024 is close at hand, but there’s still a lot of ground to cover before we break out the new calendar. Next week will bring a decision from the U.S. Federal Reserve (Fed). Are we looking at a 25 basis point (bps) or 50 bps cut, and how many more cuts before the end of the year? The U.S. Congress can’t agree on much at all, but they need to pass a continuing resolution (CR) soon or risk a government shut down. They need to address the debt ceiling issue before the end of the year too, or risk a technical default on the U.S.’s debt. We can’t say enough about the importance of the U.S. presidential election in November, and it's going to come down to the wire if not into overtime. Geopolitical conflicts in the Middle East and Ukraine show no signs of abating and could expand at any moment. It’s probably a good time to review your portfolio and make sure it is in an all-weather state.
Macro Dive: This week we’ll look at the evolving labor market situation in the U.S. before turning to inspect the latest inflation data. Then we’ll recap the ECB’s rate decision and what other central banks might have in store.
Against this backdrop, Real Assets saw flat returns overall this week, as did the broader equity market. Within Real Assets, Global Real Estate Securities saw positive returns, besting the broader market with strength seen in U.S. Data Centers and Asia ex Japan real estate names. Treasury Inflation-Protected securities (TIPS) also saw positive returns this week. Global Infrastructure securities were flat, in line with the broader market, while Commodities declined, and Natural Resource equities fell more as energy commodities and producers saw weakness.[2]
Why it matters: It feels like the end of 2024 is close at hand, but there’s still a lot of ground to cover before we break out the new calendar. Next week will bring a decision from the U.S. Federal Reserve (Fed). Are we looking at a 25 basis point (bps) or 50 bps cut, and how many more cuts before the end of the year? The U.S. Congress can’t agree on much at all, but they need to pass a continuing resolution (CR) soon or risk a government shut down. They need to address the debt ceiling issue before the end of the year too, or risk a technical default on the U.S.’s debt. We can’t say enough about the importance of the U.S. presidential election in November, and it's going to come down to the wire if not into overtime. Geopolitical conflicts in the Middle East and Ukraine show no signs of abating and could expand at any moment. It’s probably a good time to review your portfolio and make sure it is in an all-weather state.
Macro Dive: This week we’ll look at the evolving labor market situation in the U.S. before turning to inspect the latest inflation data. Then we’ll recap the ECB’s rate decision and what other central banks might have in store.
- U.S. job growth continues to slow: There were several indicators over the last week that show job growth in the U.S. is continuing to cool. Starting with the JOLTS survey released on September 4, there were just 7.67M job openings reported in July, below estimates of 8.10M, and below the initial read of 8.18M in June (which was revised down to 7.91M). The following day the ADP Employment report showed only 99K private jobs added in August, well below estimates of 145k and the lowest since September 2023, while also sliding from July’s 111k (revised down from 122k). Then on September 6, nonfarm payrolls for August showed only 142k jobs added, below estimates of 165k, while July’s add was revised down to a mere 89k (from 114k) with a 2-month net revision down 86k jobs. On the bright side, job loss remains contained, with unemployment in August falling 0.1% to 4.2%, and initial jobless claims have not moved meaningfully higher, hanging around the 220-230k range for the past six weeks while continuing claims have trended lower over that same period. Nonetheless, we would expect slower creation of jobs to tilt the Fed’s hand towards supporting economic growth over further fighting of inflation.[3]
- Inflation at room temperature: The latest batch of inflation data wasn’t hot, nor was it cold, it just sort of was, although maybe a bit mixed when you dig in. Consumer Price Index (CPI) data for August came out on the final day of our review period with a headline year-on-year print of 2.5% and a core print (excluding volatile food and energy) of 3.2%. The headline number was down from 2.9% in July, while core was unchanged. The month-on-month print for headline was unchanged at 0.2% while core rose to 0.3% from 0.2% in July. Over the past 12-months, gasoline, fuel oil, and used car prices fell the fastest, all down over 10%, while the fastest growing segment was transportation services at almost 8%. Shelter cost, up 5.2%, remains elevated as well. The following day, Producer Price Index (PPI) data for August was released with a headline year-on-year print of 1.7% and a core print of 2.4%, both lower than the revised July prints of 2.1% and 2.3%, respectively. Month-on-month PPI did show some acceleration at 0.2% (from flat) for headline, but core was unchanged overall at 0.3%. Overall, nothing in these releases should give the Fed reason to pause its expected rate cut next week.[4]
- ECB cuts as expected: Just following our review period, the ECB voted to lower key policy rates by 25 bps for the second time this year. In her prepared remarks, ECB President Christine Lagarde noted ECB staff still expects to see eurozone inflation at 2.5% this year, 2.2% next, and falling to 1.9% in 2026, while also indicating “economic growth remains tilted to the downside.” What she did not do was give any indication of when the next rate cut could occur, but rather indicated they “will continue to follow a data-dependent and meeting-by-meeting approach.” An October cut (the ECB’s next meeting) is far from certain, with overnight index swaps indicating about a 50/50 chance, while a full cut is priced in by the December meeting. Elsewhere, Denmark’s central bank cut rates by 25 bps the same day, although all eyes and ears will be on the Fed’s meeting next week as well as the Bank of England (BOE). While the BOE is not likely to reduce rates again until their November meeting, regardless of whether the Fed cuts by 25 bps or 50bps we expect its forward guidance will suggest meaningful cuts to come.[3]
Real Assets, Real Insights: We’ll first review what was learned about Australian real estate securities during the most recent earnings season. Then, we’ll look at why East Coast ports might get gummed up this fall. Finally, we’ll drill down on why chocolate prices are still creeping higher.
- Surf’s up for Australian real estate (Real Estate): Australian Real Estate Investment Trusts (AREITS) saw big waves of volatility during their latest earnings reporting season, despite overall flattish returns. Incoming winds from debt costs were felt unevenly, but material asset devaluations saw management teams call the trough in asset values, leading some investors to carve to different sub-sectors. Asset fundamentals in retail stayed on their board longer-than-expected, helping support valuations. Retail leasing spreads remained positive (but moderating), supported by high levels of employment, high wage growth, low tenant occupancy costs, and July 2024 announced tax cuts. Residential sales in the 4th quarter supported some names, but others were caught inside by higher commercial and mixed-use development completions, causing them to materially rebase earnings downward. Meanwhile, office assets can’t catch a break, with some valuations being marked down by as much as 11% as higher vacancies continue to challenge effective rent growth. Overall, we expect that fiscal year 2024 earnings are the cycle trough, with earnings growth expected to inflect higher year-over-year for at least the next 2 years, as debt and fundamental headwinds fade, creating an environment where AREITs could get amped and perform relatively well.[5]
- Possible East Coast port shutdown (Infrastructure): In a situation we’ve been watching closely for months now, port workers on the East Coast and Gulf of Mexico look to be headed towards a strike on October 1st, their first since 1977. The contract that covers 36 U.S. ports and around 45k members of the International Longshoremen’s Association (ILA) is expiring on September 30th, and parties are still far apart on major topics including wages and the use of automation. The ILA has already given the legally required 60-day strike notice, and workers look ready to walk if their demands are not met. In anticipation, shippers have been trying to move as many goods in as possible, with July’s port volume hitting a 26-month high, and August appears to be about 13% higher than the year ago period. Even a short strike could take months to recover from given the potential bottlenecks, and shipping costs could skyrocket as containers are rerouted to the West Coast and moved across the country by rail. It’s also unclear how much extra traffic the Panama Canal can handle, which could further increase shipping times. More will become clear in the coming weeks, but it might make sense to get your holiday shopping done early this year just in case.[6]
- Rich chocolatey prices (Commodities): Cocoa bean prices were back at it again, with futures prices rising over 12% this week alone, and fully collateralized contracts have returned over 180% year-to-date. The 2023-2024 growing season is expected to see a deficit of ~520,000 tons and would represent the third consecutive season of supply deficit. First, too much rain and flooding in key West African growing countries caused rampant fungal disease, then dry Harmattan wind conditions stunted bean growth. We would add deforestation, fertilizer shortages, and increased labor costs (cocoa growing is very labor-intensive) to the list of issues as well. Chocolate prices in the U.S. are up and could go even higher as cocoa bean shortages persist, and a strike at East Coast ports (mentioned above) certainly wouldn’t help either. Of some consolation, at least one forecasting analyst sees the deficit ending in the 2024-2025 season with a slight surplus expected, although weather conditions will still have a say in the matter.[7]
