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- Real Assets extended QTD outperformance
Market index returns
Week to date since September 11, 2024 as of September 18, 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 posted positive performance over the week as risk assets rallied. The U.S. Federal Reserve (Fed) delivered a much-anticipated rate cut at its latest Federal Open Market Committee (FOMC) meeting. The S&P 500 hit fresh highs as traders bet the Fed will be able to engineer a soft landing for the economy. While bullish market sentiment is evident, there are still enough challenges to build a wall of worry, such as growth slowdowns in Europe and China, as well as potentially negative seasonal patterns. European industrial production fell 0.3% month-over-month, more than the -0.1% drop in the previous month. China’s industrial production and retail sales both slowed in August, down to 4.5% and 2.1% year-over-year, respectively. China’s combination of protracted deflation, a decline in property markets, and a large amount of debt raised the specter of a balance sheet recession and the potential for Japanification as it faces declining inflation, a weakening yuan, population growth, and lowering policy rates.[1]
Against this backdrop, Real Asset returns outpaced global equities. Within the Real Assets classes, Natural Resource Equities led the way with strong performance from Metals & Mining, especially Base, Steel, and Bulk. Commodity futures followed with Industrial Metals outperforming, specifically Aluminum. In addition, Sugar and Coffee futures outperformed, as did Silver and Palladium. Global Infrastructure securities posted positive performance as well, narrowly edging out the broader market. Global Real Estate securities also saw positive performance but fell short of the return seen in broader global equities as U.S. real estate failed to participate fully in the rally, although the Office, Hotels, and Self Storage segments performed well. Treasury Inflation-Protected securities (TIPS) were the real asset laggards but did see small positive returns this week, with the 1-10 year segment marginally leading the way.[1]
Why it matters: Heading into the final quarter of 2024, there are still many bricks in the wall of worry which require continued vigilance. The Fed delivered its first rate cut, and the market is trying to anticipate how many more cuts are in store for the rest of this year and next. Budget challenges remain in the U.S., U.K., and France, to name a few, and the U.S. Congress needs to avoid another government shutdown by passing a continuing resolution while also raising the debt ceiling or risk a default. Add in a U.S. presidential election, which is likely to be contentious and possibly extend past the November 5th election date, as well as ongoing wars in Ukraine-Russia and the Middle East, and markets could still face a volatile brew heading into the end of the year.
Macro Dive: This week we’ll look at central bank activity and the Fed’s rate decision, as well as the U.S. labor market situation.
Against this backdrop, Real Asset returns outpaced global equities. Within the Real Assets classes, Natural Resource Equities led the way with strong performance from Metals & Mining, especially Base, Steel, and Bulk. Commodity futures followed with Industrial Metals outperforming, specifically Aluminum. In addition, Sugar and Coffee futures outperformed, as did Silver and Palladium. Global Infrastructure securities posted positive performance as well, narrowly edging out the broader market. Global Real Estate securities also saw positive performance but fell short of the return seen in broader global equities as U.S. real estate failed to participate fully in the rally, although the Office, Hotels, and Self Storage segments performed well. Treasury Inflation-Protected securities (TIPS) were the real asset laggards but did see small positive returns this week, with the 1-10 year segment marginally leading the way.[1]
Why it matters: Heading into the final quarter of 2024, there are still many bricks in the wall of worry which require continued vigilance. The Fed delivered its first rate cut, and the market is trying to anticipate how many more cuts are in store for the rest of this year and next. Budget challenges remain in the U.S., U.K., and France, to name a few, and the U.S. Congress needs to avoid another government shutdown by passing a continuing resolution while also raising the debt ceiling or risk a default. Add in a U.S. presidential election, which is likely to be contentious and possibly extend past the November 5th election date, as well as ongoing wars in Ukraine-Russia and the Middle East, and markets could still face a volatile brew heading into the end of the year.
Macro Dive: This week we’ll look at central bank activity and the Fed’s rate decision, as well as the U.S. labor market situation.
- The Fed “recalibrates:” After a summer of waiting, investors cheered the Fed’s telegraphed decision to lower their key policy rate. Prior to the meeting, the market was roughly split between expecting a 25 bps vs. 50 bps reduction; therefore, by cutting 50 bps, the Fed has front-loaded easing. The Fed’s self-described “recalibration” of policy was seen to prioritize addressing weakness in the labor market over the threat of inflation, which has been trending in the right direction. The market continues to price in more easing than the Fed as post meeting the futures market is pricing in roughly 75 bps in additional easing by the end of the year 2024 and up to 200 bps by the end of 2025. The market is currently implying a Fed Funds rate at the end of 2025 of 2.85% which is 50bps lower than the Fed’s dot-plot estimate provided on Wednesday, which is forecasting 50 bps of easing by the end of the year and 150 bps by year end 2025.[1]
- U.S. Employment endurance: Initial jobless claims fell to 219k for the week ending September 14. This figure was lower than estimates of 230k and lower than the previous week’s figure of 230k. Continuing claims fell to 1,829k, lower than the downwardly revised 1,843k in the prior week. The jobless claims number hit its lowest reading since May, suggesting strength in the labor market even as hiring has slowed. The Fed’s decision to cut by 50 bps erred on the side of caution to help put a floor under the labor market. Regionally, the largest increases for initial claims were in Texas, New York, and California, while Massachusetts saw the largest decrease in claims.[1]
- “One of these things is not like the others:” Central Bank divergence was evident in global monetary policy activity, the Bank of England (BOE) held rates steady in an 8-1 decision at its last meeting. The BOE also maintained its pace of balance sheet runoff at 100 billion pounds. South Africa’s central bank (SARB) cut its repo rate 25 bps, down to 8% to help support economic growth. However, in Brazil, its Central Bank (BCB) bucked the global easing trend by hiking rates 25 bps as they cited upside risks to the inflation outlook. The BCB’s hike lent support to the real, which strengthened against the dollar. The BCB’s decision stands in contrast to other regional economies that have cut rates, such as Colombia, Mexico, Peru, and Chile.[1]
Real Assets, Real Insights: We’ll first review changes to U.S. commerce trade rules, then check on August’s commercial building data and developments for the U.S. steel market.
- Relatively de minimis: The U.S. White House administration is proposing changes to tariffs to address a flood of new packages headed to the U.S. market, which rose from 140 million to more than a billion in just 12 months. The de minimis rule allows shipments valued at $800 or less to enter the U.S. without paying duties and little scrutiny. The administration is considering lowering the $800 figure to limit the flood of low-value goods coming from foreign countries via e-commerce platforms. The proposals could cause fears that air cargo demand would be reduced, which would thus weigh on transport companies. However, the actual potential impact could be minor, as many of the parcels are of low value and could still fall under the proposed limits and remain de minimis.[1]
- Tepid starts: U.S. Census Bureau data for August showed that apartment permits and starts rose to 451k, up from 416k in the previous month. This multi-family data covers buildings with five or more units. On the commercial real estate side, starts were down 21% month over month and down 28% year over year. Overall, this decline represented 1.5% of existing real estate stock, which was lower than the 2% average of stock since 1970. The Industrial segment showed the largest drop in starts, followed by Retail, Office, and Lodging. Weighing on starts were higher construction costs, low underwriting growth, relatively higher rates, and construction financing becoming harder to find.[1]
- Wall of Steel? The U.S. steel market saw significant developments, including a major trade case filed by U.S. mills and the United Steelworkers Union against coated flat-rolled steel imports from ten countries. The U.S. government’s security panel granted Nippon Steel permission to refile its petition to purchase U.S. Steel, which has been politically opposed. This extension will push the review decision past the U.S. presidential election, at which time it might be more politically feasible for the deal to close. The trade case was put to the International Trade Commission to apply anti-dumping and duties on imports of corrosion-resistant flat-rolled steel from Australia, Canada, Brazil, the Netherlands, Mexico, Taiwan, South Africa, the United Arab Emirates, Turkey, and Vietnam. This was one of the largest cases put forward in nearly a decade.[1]
