Real assets lag in February, but start strong in March

Market index returns

Month to date since January 31, 2024 as of February 29, 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 rose in February, continuing the upward trend that started in October of last year. The broader markets largely shrugged off stubborn inflation reports as well as conflicts in Ukraine and the Gaza Strip and chose instead to focus on positive earnings reports (including a Nvidia blockbuster) and expected easing from major central banks that should start later this year–with several indices hitting all-time highs in the process. Economic growth in the U.S. continues to hold up better than expected. While some European countries are in recession, new data this month showed elements of improvement and that the recessions may be shallow. While all Real Assets classes underperformed the broader equity markets for the month, posting slightly negative returns, all have started March on strong footing. During February, Global Infrastructure securities held up the best with just marginal losses (and are leading the charge so far in March), while Commodities performed the worst, although those losses have largely been erased over the first few days of March. For a more extensive recap of February, check out our deep-dive commentary by clicking the button above.

Why it matters: Make no mistake about it, February was a good month for the broader capital markets, and the inertia is carrying over into March. Furthermore, the breadth of stocks moving higher has widened considerably and even includes an impressive snapback in China’s stock market. Yet key questions remain, such as: has the fight against inflation really been won or will prices start to rise again, given the general increase in paper wealth (US households added $4.8T in net worth in 4Q)? The latter scenario could be particularly dangerous with the consensus view that the U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BOE) are all expected to start cutting rates this summer. We also face elevated geopolitical risks with ongoing conflicts in Ukraine and the Gaza Strip and with China reinforcing its claim on Taiwan. Finally, we have several elections around the globe that will occur this year, whose outcomes could have profound consequences for years to come.

Macro Dive: We first review the latest employment data in the U.S., followed by a review of the Fed Chair’s testimony to Congress, and then move to the outcome of the latest ECB meeting. Finally, we wrap up with China’s latest economic targets for 2024.

Payrolls strong, but what happened in January?: February’s change in nonfarm payroll looked strong at 275k (vs. 200k estimate), but a backwards two-month revision of -167k has us wondering if that number will stick. Of that revision, 124k fewer jobs were created in January (35% less than initially reported), with the balance being fewer jobs in December. February’s unemployment rate rose more than expected to 3.9%, when compared to estimates and the prior month’s print of 3.7%. The JOLTS report for January was also released this month, showing 8.86M job openings, just above estimates but just below December’s downwardly revised 8.89M openings. Initial jobless claims this week were essentially the same as last week and in line with estimates of 217k, but continuing claims picked up a tad to 1,906k. This resilient yet slowly cooling labor market data, when coupled with slightly softer than expected ISM Services data this week, likely reinforces some soft landing optimism and can provide the Fed cover to begin easing soon.
Are we there yet?: Fed Chairman Jerome Powell testified before the U.S. Congress for two days this week. In his remarks, he suggested that although the Fed is not yet ready to cut interest rates, “we’re not far” from reaching a sustainable 2% inflation rate. Powell also provided large financial institutions with positive news, walking back some of the proposed plans related to forward-looking capital rules that would have required the eight largest U.S. banks to increase how much capital they hold by ~19%. At a separate event, the Minneapolis Fed President, Neel Kashkari (a non-voting member in 2024), addressed policy expectations by stating he expects just two or potentially even only one cut this year. While he emphasized the dependence of incoming data, he took a further hawkish step by stating, “If we start to see multiple high inflation prints and inflation starts to flare back up again, that could justify us going and raising rates further.” It appears market participants disagree with his prognosis; following Powell’s testimony, Fed Funds futures indicate 3 or 4 cuts this year, with the first most likely coming in June.
ECB waiting, watching, wishing: The ECB concluded its policy-setting meeting on Wednesday, opting to keep key interest rates unchanged. ECB President Christine Lagarde acknowledged the slowdown in consumer prices but indicated more data was needed to ensure inflation would fall to the 2% target by 2025. She further indicated that with incoming data, they would “know a little more in April” and “a lot more in June,” setting the expectation that June is the most likely meeting for a first cut. The ECB’s new inflation projections for the eurozone were tamped down to 2.3% this year (from 2.7%), 2.0% in 2025 (from 2.1%), and 1.9% in 2026 (unchanged). However, GDP growth projections were also reduced for 2024 to 0.6% (from 0.8%) but were left unchanged for 2025 at 1.5% and slightly increased for 2026 to 1.6% (from 1.5%). Given the expected tepid economic growth this year, rate cuts would be a welcome sign.
China hangs 5: China’s National People’s Congress released economic targets for 2024 this week. Most notable was the goal of “around 5%” GDP growth this year which, interestingly, is the same target as last year. While the reported realized growth in 2024 was 5.2%, most economists believe the real number is much lower. An inflation target of 3.0% for 2024 was also released, which again matches the 2023 target, yet actual inflation in 2023 only registered 0.2% as the nation suffered from poor domestic demand and a faltering housing market. Their target urban unemployment rate for 2024 of 5.5% was unchanged from the prior year’s target, though the reported 5.2% for 2023 has also been questioned given the high level of youth unemployment (where figures went unreported for part of the year). Another target that matches 2023 but has been increasing in recent years is an expected increase of 7.2% in defense spending. Many will be watching this buildup in military spending carefully, as the released report stated China “resolutely opposes separatist activities aimed at ‘Taiwan independence’ and external interference.”

Real Assets, Real Insights: This week, we review electric utilities’ role in preventing wildfires, look into the most recent announcements from OPEC+, and glimpse at the record-shattering start to March that gold is having.

Only “utes” can prevent wildfires (Infrastructure): As it comes to light that a regulated utility might be to blame for a fallen pole that ignited the devastating wildfire in the Texas panhandle region, we wanted to highlight that wildfire risk and other extreme weather events are becoming an increasingly important topic within the utility industry, and one that does not seem to be going away anytime soon. Climate change, as well as population growth in wildland urban areas, are increasing the risk of wildfires, and utilities are adapting their policies, procedures, and capital expenditures to help decrease the associated catastrophic wildfire risk. However, these measures will require significant amounts of capital investment in resiliency-related spending and will likely lead to higher electricity costs for consumers. Some examples of this resiliency spending could be undergrounding transmission and distribution lines, reinforcing lines with covered conductors, high-tech analytics systems (e.g. AI) in the field to detect anomalies, and more advanced weather station technology. In conclusion, our hearts and prayers are with the people in Texas affected by this tragedy, and we look forward to engaging with the electric utilities to help prevent these costly fires from happening again.
Is OPEC+ losing its mojo? (Commodities & Natural Resources): OPEC+ announced this week that voluntary crude oil production cuts would extend through the 2nd quarter of 2024. This extends the previously announced reduction of 2.2M bbls per day (led primarily by Saudi Arabia), while Russia announced an additional 471k bbls per day of cuts, yet crude oil prices fell in the wake of the announcement. Additionally, OPEC’s global market share of crude production fell to the lowest level on record, with U.S. producers (and other non-OPEC members) making up the difference. In one example, the U.S. is now the top supplier of crude oil (as well as diesel and LNG) to Europe, with many other exporters unwilling to cross the Red Sea given ongoing security concerns. Furthermore, the U.S. oil and gas rig count has been slowly and steadily increasing, indicating the potential for increased future output. Although many believe that the OPEC+ cuts will start to unwind in Q3 this year, there is a chance they could be extended if crude prices do not reflect underlying market fundamentals or if there are lingering concerns about the outlook for global demand.
The Elvis Presley of metals (Commodities): While Elvis still holds the Recording Industry Association of America’s (RIAA’s) record for the most gold (or better) records, gold continues to set its own records. The shiny yellow metal continues to push the bar higher and recently set a new all-time high, crossing above $2,159/oz in the first week of March. Gold typically benefits when interest rates fall, and moderating inflation and new economic data in the U.S. support the market’s view that a potential rate cut from the Fed is right around the corner (possibly in June). Additionally, concerns over New York Community Bank and overseas conflicts (such as in the Red Sea region) have been positive contributors to the risk-hedging demand for gold. We have also previously noted the strong buying of gold by central banks, especially from China, Poland, and Singapore, and we expect this trend to continue through 2024. Finally, if the U.S. dollar weakens as we expect with the Fed pivoting to easing mode, this should provide an additional tailwind for the King of Precious Metals.

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