Market index returns

Week to date since October 23, 2024 as of October 30, 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 narrowly edged higher in our review period as the world awaited the outcome of the U.S. presidential election. However, just following our review period on October 31st (Halloween), equity markets saw all tricks and no treats as earnings results from large tech names spooked investors, with the MSCI World Index giving up those gains and more. After seeing some reprieve early in our review period, interest rates continued to grind higher with the 10-year U.S. Treasury yield closing out our review just above the 4.30% mark and with inflation expectations rising as well (as evidenced in inflation breakevens). Crude oil prices settled as the long-awaited Israeli strike on Iran came and went with limited damage, yet gold spot prices in the U.S. hit a new all-time high of ~$2,788 per ounce to close out our review.^[1]

Against this backdrop, Real Assets saw negative returns for the second week in a row. Treasury Inflation-Protected securities (TIPS) were the standout, coming in with flat returns. Losses in Commodities were contained as solid returns in precious metals offset weakness in the energy complex. Global Real Estate securities saw a mild decline with U.S. net lease, industrial, and residential real estate investment trusts (REITs) pulling the group into negative territory. Losses in Natural Resource equities were a bit higher, and Global Infrastructure securities were the laggards, with communication and utilities names in the U.S. weighing on the group in the face of higher interest rates.^[2]

Why it matters: The world gave a collective exhale as the Israeli strike occurred without much ado, although it’s likely we revisit this tension in the Middle East in the future; it’s just a matter of what and when. The rise in longer-term interest rates is worth watching closely, as this is occurring not just in the U.S. but in the UK and most of Europe as well. Similar to the U.S., the UK has a governmental spending problem, while Europe has an economic growth problem (in addition to spending problems). With inflation in the Eurozone picking up to 2.0% in October (from 1.7% in September) and with inflation expectations trending higher in the U.S., central banks could find themselves in a bind as it feels like they just started their easing groove. As for the upcoming main event, next week’s U.S. presidential election, the race remains tight and results are unlikely to be fully known on election night, but the outcome will have ramifications on many policies (and asset classes) for years to come.

Macro Dive: This week, we’ll look at the U.S. Treasury’s refunding and new issuance plans for the fourth quarter. Next, we’ll review the latest GDP and inflation data in the U.S. Then, we’ll recap the most recent employment and hiring data released in the U.S.

• A billion here, a billion there: The U.S. Treasury Department released its quarterly financing estimates this week with expectations to borrow $546B in the fourth quarter (which is $19B less than July’s estimate) and $823B in the first quarter of 2025. However, the first quarter plan is contingent on the U.S. Congress lifting or continuing to suspend the debt ceiling limit in a “timely” manner. Auction sizes for notes and bonds are not expected to increase for the next several quarters, although TIPS are expected to see an increase in auction size “in order to maintain a stable share of TIPS as a percentage of total marketable debt outstanding." Any increase in needed bill issuance will likely come from cash management bills (which can vary from days to months in maturity) rather than the typical standard maturities, although there appear to be efforts to give the current 6-week cash management bill benchmark status in early 2025. A mix of 3-year, 10-year, and 30-year securities will be refunded in November to the tune of $125B, raising an incremental ~$9B. Overall, the plans seemed in line with expectations, but we remind readers that U.S. Congress contingency is a big one.^[3]
• Surprise, no surprise: The advance read of U.S. 3rd quarter GDP and September’s Personal Consumption Expenditures (PCE) data was released this week and was reported mostly as expected. GDP of 2.8% was a bit shy of 2.9% market forecasters’ estimates, but essentially on top of the Federal Reserve Bank of Atlanta’s GDPNow forecast (although their forecast was lowered from 3.3% just a day earlier). The GDPNow forecast for 4Q currently sits at 2.3% indicating growth is likely slowing. The following day, PCE was released with a month-on-month headline print of 0.2% and core (excludes food and energy) of 0.3%, both in line with estimates, although both were 10 bps higher than August. The annual headline print of 2.1% was again inline but lower than August’s upwardly revised 2.3%, while core was 2.7%, above a 2.6% estimate but unchanged from August. If there were any surprises in the data, it was found in personal spending where month-on-month spending grew 0.5% in nominal terms and 0.4% in real terms, both ahead of estimates and accelerating from August. Overall, this data shows the U.S. economy remains in a healthy and expansive state, backstopped by resilient consumer spending, but slowing and with mild inflation that needs to be watched carefully.^[1]
• Hurricane noise in the payroll data: Nonfarm payroll for October showed just 12k jobs created, well below estimates of 100k and the lowest since a negative print in December 2020. The change in private payroll was negative for the first time since December 2020 as well, meaning what few jobs were created occurred in governmental hiring. Furthermore, the 2-month net revision was a negative 112k, meaning fewer jobs were created in August and September than initially reported. However, the unemployment rate held steady at 4.1% but came with a caveat. The U.S. Bureau of Labor Statistics (BLS) noted hurricanes and the Boeing strike likely weighed on the weaker payroll data while additionally mentioning participation in the survey collection used for unemployment statistics was “well below average,” signaling its data may have been incomplete. In any event, the weaker payroll data was previewed in the JOLTS data earlier this week, where September showed just 7.44M job openings below estimates of 8.00M, a decline from August’s 7.86M (which itself was revised lower from over 8M), and the lowest level since February 2021. Overall, the weaker payroll print was well received by the equity markets (bad news is good news), as the data likely indicates the U.S. Federal Reserve may have less hesitation on easing rates at its next few meetings.^[4] 

Real Assets, Real Insights: First, we’ll look at trends in a property type that is taking names and helping save lives. Then we’ll look at one of the most recent announcements in the data center and electric utility space aimed at providing the AI backbone. Finally, we’ll look at what’s driving crude oil prices following the Israeli strike on Iran.

• It’s alive! (Real Estate):  Recent earnings reports from Healthcare REITs have shown some encouraging signs for the space. Acquisitions activity is picking up, capital is being raised, and tenant health is improving. CareTrust REIT Inc. (CTRE) closed over $441M of deals in 3Q and has almost $600M under contract, while raising ~$1B of common equity in 3Q and October and paying down debt to almost a $0 balance. Meanwhile, Welltower Inc. (WELL) acquired ~$2.2B of assets in 3Q and committed an additional ~$200M for new development projects. WELL ended the quarter with $3.8B of cash on hand and $5B available under their line of credit. Additionally, Ventas Inc. (VTR) acquired $1.25B of assets in 3Q and October and has been consistently raising equity via their at-the-market offering program. Across the Healthcare REITs, many assets are net leased to operators, where we have seen rent coverage broadly increase this quarter, but even in cases where the REIT shares in the underlying operating results, such as some assets at WELL and VTR (via RIDEA structures), portfolio occupancies have been on the rise and are expected to continue increasing in 2025.^[5]
• How big is your strategic partnership? (Infrastructure & Real Estate):  This week, KKR & Co. Inc., a private equity investment firm, and Energy Capital Partners (ECP), the largest private owner of power generation in the U.S., announced a $50B strategic partnership to fund data center development, power generation, and electrical grid improvement across the globe. Due to the needs of AI and cloud computing, the pair expects data center demand in the U.S. to nearly triple by 2030 and require over $1T of new capital investment in data center development and the related energy infrastructure. They further estimate that the incremental power demand from data centers alone will grow by 160% over the same period. Over the past few years, the lack of available power generation and related transmission infrastructure has been a limiting factor in data center development. KKR and ECP are each contributing existing assets as well as future capital spending to the partnership and additionally “plan to engage with industry leaders including utilities, power and data center developers, and independent power producers to accelerate the delivery of data center campuses required by hyperscalers.” ^[6]
• Crude oil falls after Israel strikes Iran (Commodities):  Crude oil prices declined this week after the long-awaited Israeli strike on Iran avoided a worst-case scenario. The strike was limited to military installations and weapons manufacturing facilities and avoided more sensitive areas such as nuclear enrichment and oil infrastructure targets. This led to a 3.2% decline in the prompt month futures contract on Brent crude oil and a 3.1% decline for WTI crude, with prices even lower during the week and the latter falling comfortably below $70 per barrel. While Iran has claimed a “right to self-defense” after the attack, it has downplayed the damage done by the missile strikes, and tensions appear to be simmering down for now. With this behind us, crude oil is much more likely to trade on fundamentals, which show crude is relatively well supplied for now. Some members of OPEC+ have been producing above quota, which will test the cartel’s resolve and the ability of Saudi Arabia to maintain discipline. Russia has been refining less of late and exporting more crude, with trailing 4-week shipments hitting a new high. While production looks to swing to a surplus near-term, demand from China remains a wildcard as recent stimulus looks to quicken growth, and the December 1st OPEC+ meeting could see planned increases delayed into 2025.^[7]