Market index returns

Week to date since April 3, 2024 as of April 10, 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.

Global equities were on track for a winning week until the latest Consumer Price Index (CPI) data was released in the U.S. With inflation failing to show continued decline towards the U.S. Federal Reserve’s (Fed’s) 2% target, interest rates rose, and equity markets faltered. The U.S. 10-year Treasury yield crossed above 4.5% for the first time since last November, and investors again pushed back their expectations on when the Fed might begin to cut rates and lowered expectations to just two (or fewer) cuts this year. Breakeven inflation levels rose (see our dashboard by clicking the button above), volatility in equity markets rose, and the U.S. dollar strengthened. Despite higher interest rates, the price of gold also rose given its haven status, exceeding the $2,300/oz level for the first time ever. Against this backdrop, Real Assets also declined but outperformed the broader equity markets. Commodities and Natural Resource Equities ended our review period with gains and continued their strong start in April. Global Real Estate securities, buoyed by strength out of the Asia Pacific region, and TIPS finished our week in negative territory but outperformed the broader equity markets. Global Infrastructure securities saw greater losses, with weakness in Europe and Americas Communications, and underperformed the broader equity markets.

Why it matters: Inflation concerns in the U.S. are picking up traction while the situation in Europe continues to improve. While there are many months left in the year, this could lead to a situation where we see multiple rate cuts from the European Central Bank (ECB) this year and none from the Fed, likely leading to some interesting currency movements and rotation among asset classes. While there appears to be a thawing of U.S.-China relations following U.S. Treasury Secretary Janet Yellen’s recent trip to China, the situations in Ukraine and the Middle East remain grim. Global support for Ukraine is reaching a point of fatigue, and the U.S. Congress can’t seem to pass a bill offering more aid (or any bill for that matter), and in fact, House Speaker Johnson’s leadership position could be in jeopardy not even six months into his new role. Meanwhile, Israel continues to push further into Gaza, going against the global consensus, and Iran has vowed to retaliate against Israel for the strike on their embassy in Syria, with some sort of activity likely in the coming weeks that would almost assuredly broaden the conflict in the Middle East.

Macro Dive: This week we review recent CPI and Producer Price Index (PPI) data in the U.S. We then recap the outcome of the ECB meeting. We then shift to China to look at rising debt levels and how the outlook on their sovereign credit has soured.

• Consumer Price Indigestion: U.S. CPI for March was released this week and came in hotter-than-expected. Both headline and core (excludes food & energy) CPI at 0.4% month-on-month were 10 bps higher than expected and the same as February. The headline year-on-year print of 3.5% was 10 bps higher than expected and accelerated from February’s 3.2%, while the annual core figure was 3.8%, also 10 bps higher than expected and the same as February. Perhaps most worrisome for the Fed was the “supercore” reading, which excludes food, energy, and housing costs, which registered 4.8% year-over-year, the highest level in 11 months. In the wake of the release, equity markets fell, Treasury yields spiked higher, and expectations for a first Fed cut this summer were all but eliminated, with the Fed Funds future markets not pricing in a full rate cut until the November meeting. PPI was released the following day and was tamer with month-on-month prints largely in line, though annual figures also showed some acceleration, such as core year-on-year at 2.4%, up from 2.0% in February. Minutes from the Fed’s March meeting were also released this week and showed little new information beyond what Chairman Powell has publicly stated, with perhaps the exception that most members are in favor of reducing the pace of quantitative tightening (QT) by as much as 50% “fairly soon”. By the time the dust settled this week, Fed Funds futures indicated a 60% chance of a cut by July, with at least one cut almost certain by September, but perhaps only 1 or 2 cuts in total this year.
• ECB on track for June easing: The ECB held a policy setting meeting this week and opted to hold their benchmark deposit rate the same at 4.0% (as expected) for the fifth meeting in a row. However, in the Governing Council’s prepared statement, new language was added for the first time this cycle that if consumer prices continue to fall, “it would be appropriate to reduce the current level of monetary policy restriction”. During her presser, ECB President Christine Lagarde again refused to commit to a specific date for a first rate cut, preferring to remain data dependent, but again hinted that June may be most appropriate and noted that some members are already in favor of cutting. Investors, via overnight index swaps, continue to expect the first cut to occur in June, though slightly tempered expectations of three full cuts occurring this year. Following the release, major stock indices in Europe closed lower for the day, and the euro weakened against the U.S. dollar and all other major currencies. Elsewhere in central bank activity, Canada, New Zealand, Thailand, and the Philippines also held rates steady this week.
• In the penalty box: This week, Fitch revised the outlook on China's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable. The outlook downgrade follows a similar move by Moody's in December and comes as the Chinese government ramps up efforts to kickstart their economy following a tepid post-COVID recovery. According to Fitch, the new outlook revision reflects “increasing risks to China's public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model.” “Fitch believes that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years, which could keep debt on a steady upward trend.” Financial markets were unfazed, with the yuan steady and stocks resilient in the wake of the announcement, although sentiment towards the region remains fragile. New economic data coming next week, including first-quarter growth, may give the markets clues about whether the economy has put the worst behind it. To that end, the first cab off the rank was March inflation, which cooled more than expected, as CPI dropped to 0.1% Y/Y (from 0.7% in February) and PPI -2.8% Y/Y (vs. -2.7%) in February, with weakness in PPI inflation largely due to lackluster domestic demand. 

Real Assets, Real Insights: First, we review Blackstone’s latest real estate acquisition target, before looking at some of the issues hampering UK water utilities, and then conclude with an update on Aluminum prices.

• Blackstone catches AIR(C) (Real Estate): This week, Blackstone announced a definitive agreement to acquire Apartment Income REIT Corp. (NYSE: AIRC) for ~$10B in an all-cash transaction. The acquiring Blackstone entity will be Blackstone Real Estate Partners X, a private real estate fund, which received over $30B in capital commitments in 2023, the largest real estate or private equity drawdown fund ever raised. The $39.12 per share price to be paid to AIRC shareowners represents a 25% premium to AIRC’s closing price before the announcement of the deal. AIRC’s portfolio of ~27k units over 76 apartment communities is concentrated primarily in coastal markets, such as Miami, Los Angeles, Boston, and Washington D.C. This new deal in the multifamily rental space follows Blackstone’s announcement earlier this year of acquiring Tricon Residential Inc. (NYSE: TCN), a single family rental company, and further projects Blackstone’s views that current prices in the listed real estate market are undemanding and that their longer term outlook on residential real estate is favorable. 
• UK utility in troubled water (Infrastructure): The parent company (Kemble Water Finance) of the largest water utility in the UK (Thames Water) recently sent a formal notice of default on a £400m bond. Kemble, a privately backed company, had previously asked existing shareholders to contribute an additional £500m in the entity, but with unsuccessful results. While the Thames Water entity itself is not technically in default, contingency plans are being made that could see the utility split into multiple units that could eventually be held for sale. There’s another scenario where Thames Water could be placed into a Special Administrative Regime (SAR) by the UK government, although there appears to be little appetite at present from the current administration. However, with local elections being held in early May and a general election expected later this year or early next, the situation is expected to remain “fluid.” Importantly, listed UK water players generally have their balance sheets in better shape and aren’t facing debt issues. However, regulators in the UK have been cracking down on the levels of sewage that water companies allow to overflow into public waterways during periods of storm overflows, leading to a blackeye for the industry as a whole and larger fines for violators.
• Helter smelter (Commodities): Aluminum prices have quietly been on the rise, with front-month contracts on the London Metal Exchange (LME) closing in on $2,500/metric ton, a level not seen since February 2023. Demand for aluminum is expected to grow given its uses in wind turbines and solar farms, and beverage makers have already noted aluminum cans are in short supply. Aluminum production in the U.S., which was once the world’s top producer, has fallen by almost 80% over the past 24 years as production has shifted to countries with cheaper sources of power. China, now the world’s top producer of aluminum, is having its own issues as major smelters in the Yunnan province are facing power shortages as dry weather has reduced hydropower generation, the main source of electricity in the region, and is only expected to get worse this year. There has been a lack of new aluminum smelting capacity added on a global basis in recent years, which could significantly tighten global balances. Additionally, the world's largest aluminum producer recently flagged risks to the bauxite (the raw material used to make aluminum) supply from Guinea, which could put further upward pressure on the price of aluminum.