Market index returns

Week to date since March 6, 2024 as of March 13, 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.

• Sticky situation: Following hotter-than-expected inflation for January, this week’s release of February’s Consumer Price Index (CPI) and Producer Price Index (PPI) provided  similar results. First, headline CPI of 0.4% month-on-month was in line with expectations but 10 bps higher than January, while the year-on-year print of 3.2% was 10 bps higher than expected and the prior month. Core CPI (which excludes food & energy) came in ahead of expectation at 0.4%, but was in line with January, while the core year-on-year print of 3.8% was 10 bps ahead of consensus but slowed from January’s 3.9%. February’s PPI is more aggravating for the Fed as all measures came in higher than expected and many accelerated from the prior month, such as year-on-year PPI final demand, which rose to 1.6% from January’s (upwardly revised) 1.0%. Following these releases, the odds of a cut from the Fed (per Fed Funds Futures) were reduced to ~65% for the June meeting and to just 3 cuts for all of 2024. While 3 cuts match the dot plot from the Fed’s December meeting, we will get a fresh update of their financial projections at the conclusion of their meeting next week, where rates are almost certainly going to be maintained at the current level.
• Retail (sales) slows, but no woes: Retail sales for February were released from the U.S. Census Bureau this week, which showed recovery from January’s negative prints but failed to meet expectations in some areas. Overall sales grew by 0.6% month-on-month (better than -1.1% in January but below expectations of 0.8%), while retail sales ex autos and gas rose 0.3% (in-line and better than January’s -0.8%). On a year-on-year basis, overall sales grew by 1.5% and by 2.2% ex autos and gas. The fastest-growing categories on a year-on-year basis were non-store retailers at 6.4% and food services & drinking places at 6.3%, while furniture & home furnishing stores declined the most at -10.1%. While the release was predominantly viewed in a negative light(having missed headline expectations) it is a key data point for the Fed to put in the column of reasons to cut rates. We would also note that within the retail space, and especially for malls, leasing demand has been robust, and while some store closures have been announced, tenants have generally shown minimal distress to date.
• NIRP no more? Japan has remained recession-free, for 5 years and counting. Preliminary estimates of Q4 GDP made for a depressing reading, as they indicated the economy had unexpectedly slipped into a technical recession at the end of 2023. However, the second reading (released on March 11) brought an upward revision to headline GDP growth and into positive territory at +0.4% annualized, meaning Japan has narrowly avoided a technical recession. Digging deeper, we see that revised capital spending was the main driver of the improved picture, but that private consumption remained sluggish. All eyes now turn to the Bank of Japan (BoJ), which has been laying the groundwork to end its negative interest rate policy (NIRP) for some time. The question remains when not if. As we write Japan’s Nikkei is reporting for the first time that the BoJ will exit negative rates and end Yield Curve Control (YCC) during its policy meeting next week on March 18-19. Reports suggest the BoJ will raise its policy rate from minus 10bps to the range of 0-10 bps. What remains to be seen is to what degree the BoJ may adjust its QE purchases in light of YCC being scrapped. It appears the central bank is front running announcements on ‘Shunto’ wage agreements, as Reuters flagged earlier this week that a growing number of BoJ board members had emphasized the importance of this event as a prerequisite to ending the NIRP. Expectations suggest wages may see the largest increases since 1991.

• When a pipe dream comes true (Natural Resources & Infrastructure): EQT Corporation (NYSE: EQT) announced their intention to acquire Equitrans Midstream Corporation (NYSE: ETRN) in an all-stock deal valued at ~$5.5B. EQT is a producer and supplier of natural gas in the U.S., and this deal will help them further realize their vertical integration ambitions by giving them ownership of over 2,000 miles of existing pipeline and control of the Mountain Valley Pipeline project, which is expected to be completed later this year. The Mountain Valley Pipeline will transport natural gas from the Marcellus shale basin in Appalachia to markets in the Southeastern portion of the U.S. and eventually onto LNG export terminals on the East Coast or the Gulf of Mexico. In EQT’s own words, this “creates America's only large-scale, vertically integrated natural gas company prepared to compete on the global stage.” However, it’s also worth noting that these companies are no strange bedfellows, as ETRN was spun out of EQT in 2018 at the urging of activist investors. While former ownership likely provided EQT an edge, given their familiarity with the assets (compared to other possible suitors), we have also observed recent trends of renewed vertical integration in the energy sector after years of separating upstream, midstream, and downstream assets.
• Seeing new life in life sciences (Real Estate): Biotechnology companies, which use living organisms to create products or  innovate solutions to challenges in key areas such as medicine, agriculture, or manufacturing, are also some of the biggest users of lab and life science office space. Life science office space was one of the better-performing real estate segments during the COVID-19 pandemic (after all, where do you think those vaccines and treatments were created?). But it had a tougher go in 2023 as funding for biotech companies (of which many are pre-revenue) became harder to come by, and while the supply of new space ramped up. While we expect the delivery of new lab space to top out this year and settle at lower levels, we’ve also noticed an uptick in venture capital (VC) funding this year; many fledgling biotech firms are funded by VC. January and February are easily surpassing the VC funding volumes seen in the same periods of 2022 and 2023, and March is on track to do the same. Valuations of biotech firms are on the rise as well, and we can see evidence of this in the listed space as the S&P Biotechnology Select Industry Index is up over 50% since last October. Perhaps on a cautionary note, or because companies are trying to make funding last longer, we have seen a slight uptick in announced layoffs at biotech firms, but if VC funding continues to improve, we would expect headcount to grow, leading to increased demand for lab and life science office space.
• One size does not fit all (Real Estate): Office markets across Asia Pacific are showing very divergent stories, demonstrating that not all offices are the same. Japan and Singapore office markets have been relatively resilient, while Australia and Hong Kong have experienced difficult operating conditions. Vacancy rates continue to increase in Australia and Hong Kong, while those in Japan and Singapore have been stable. Leasing spreads have been very negative (in the -10 to -15% range) in Australia and Hong Kong, while Singapore has enjoyed positive rent reversions of 9 to 10% and Japanese landlords are now in a position to demand rent increases. Cap rates and asset value moves have also reflected these differing fundamental pictures. In Australia, cap rates have moved up ~60 bps and asset values have fallen ~15% since the peak, while asset values in Hong Kong have fallen as well. Meanwhile, office asset values in Singapore and Japan have been relatively stable.
• Which metal has the mettle (Commodities): As the U.S. prepared new sanctions on Russian targets following the suspicious death of opposition politician Aleksey Navalny, several metals caught a bid in anticipation of being in the crosshairs of new measures. Nickel, Aluminum, Palladium, and Platinum all rose in advance of the U.S.’s official announcement, given the large amounts of these metals either mined, refined, or produced in Russia. However, given that metals escaped the new sanctions on over 500 people and entities, only Nickel held its price gains for the week, while Aluminum, Palladium, and Platinum all priced lower. In fact, Nickel gained almost 4% for the week (second only to Cotton in the commodities we track) and is the top-performing metal commodity so far in 2024. We see additional room for Nickel to climb given the series of mine supply curtailments announced over the past few weeks, though we are reminded of scandals the past few years, such as fake Nickel shipments that were nothing more than sand or steel. We’re also favorable toward Aluminum, which has been pressured by lingering uncertainty about global demand but should see a price recovery this year. On the other hand, Palladium and Platinum will need a rebound in automobile manufacturing (with combustion engines), a weaker U.S. dollar, faster Fed cuts, or more supply disruptions before a price recovery can be actuated.