31-Jan-24 Equities
John Vojticek

John Vojticek

Head of Liquid Real Assets, DWS
Geoffrey Shaver, CFA

Geoffrey Shaver, CFA

Portfolio Management Specialist – Liquid Real Assets
Edward O'Donnell

Edward O'Donnell

Senior Product Specialist, Liquid Real Assets

Real Assets up, but Fed not ready to cut

Monthly Edition

Market index returns



Month to date since December 31, 2023 as of January 31, 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 were basically flat this week but remain in positive territory for the year. Markets started our review period climbing higher, with the MSCI World Index quickly closing in on an all-time high before U.S. Federal Reserve (Fed) Chairman Powell said (in quite a few more words) they wouldn’t be giving the punch bowl back anytime soon. In the wake of these hawkish comments, markets backed off their highs and, interestingly, the yield on the 10-year U.S. Treasury dropped below 3.9% for the first time this year. Additionally, regional banks are back under the microscope, with investors looking for stress fractures after New York Community Bancorp dropped 38% in a day following their Q4 earnings results, which showed a surprise loss partially due to acquiring $13B in assets from failed Signature Bank last year. Against this backdrop, all Real Asset classes outperformed the broader equity markets this week, led by Natural Resource Equities and Global Infrastructure securities. Looking at the entire month of January, the broader markets bested all Real Assets classes. Commodities and TIPS ended January with slight gains, while Natural Resource Equities, Global Real Estate, and Global Infrastructure had losses. For a more extensive recap of January, make sure you check out our deep-dive commentary by clicking the button above.

Why it matters: There’s no doubt that rate cuts are coming, but when they start and at what pace might disappoint investors’ expectations. The situation in the Middle East remains a concern, as the potential for a widening of the conflict increased this week with the U.S. vowing a response to the attack in Jordan. Shipping costs are also likely to rise further as more cargo ships sail around Africa rather than risk traversing the Red Sea, potentially reigniting inflation. Other exogenous factors influencing capital markets include the U.S. Congress agreeing to a budget and whether it does anything to solve the lack of fiscal discipline, and, of course, who will be the next U.S. commander in chief and the divergent policy outcomes therein.

Macro Drive: This week we review both the Fed and the Bank of England (BOE) policy-setting meetings that were held, newly released employment reports in the U.S., and fresh GDP and CPI data out of Europe. We conclude with an overview of expected debt issuance from the U.S. Treasury in the first half of 2024.
  • Done hiking, but about those cuts: The Federal Open Market Committee (FOMC) concluded their 2-day meeting this week with no change in benchmark rates and effectively stated they are done raising rates. However, Fed Chairman Jerome Powell also seemed to indicate that a cut at the March meeting was off the table as the committee likely wouldn’t be ready and would prefer to wait “until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” This messaging sent equity markets moving downward as investors were expecting a more dovish tone. While the markets saw some recovery the following day (just after our review period), there remains a disconnect between the Fed’s guidance and investors’ expectations, with the last Fed dot plot indicating 3 cuts in 2024 while investors are betting on almost 6 cuts via Fed Fund futures (fractionally higher than before the FOMC meeting). Meanwhile, across the pond, the BOE also chose to hold rates steady, but with some disagreement among members in the 6-3 decision, as two members voted for a hike and one for a cut. Still, investors expect the BOE to start cutting rates this summer, with 4 or 5 cuts anticipated for the full year.
  • U.S. jobs report has something to say:  And just like that, the January nonfarm payroll report showed 353k jobs added, almost twice the 185k estimate. Furthermore, the 2-month revision showed an additional 126k jobs added, with 117k of those occurring in December. The unemployment rate held steady in January at 3.7%, better than the slight uptick to 3.8% expected. Giving further reason for the Fed to hold rates higher for longer, hourly earnings came in stronger than estimated at 0.6% month-on-month (0.3% est) and 4.5% year-on-year (4.1% est). The JOLTS report came out earlier in the week, showing 9.03M openings in December, higher than expectations, and an upwardly revised November figure. The few remaining economic bears could point to initial and continuing claims, which ticked up to 224k and 1,898k, respectively, this week, with the former the highest since August of last year, and anecdotal commentary regarding layoffs; nonetheless, with such a strong payroll print, rising wages, and low unemployment, the Fed can remain patient before slipping into an easing mode.
  • Missed it by that much: The euro zone just avoided a recession by a razor-thin margin (if you define recession as two consecutive quarters of declining GDP growth). A flash estimate of 4Q 23 GDP from the EU showed the bloc registering 0.0% growth quarter-on-quarter, exceeding expectations of a 0.1% contraction, which would have followed a 0.1% contraction in the third quarter. On a year-on-year basis, GDP growth was just 0.1%, indicating the fragile status of the region’s economy. In other positive news, the euro zone CPI for January was released on February 1st, showing the continued decline of inflation, with a month-on-month print of -0.4% (in line with estimates and lower than December’s 0.2%), while the year-on-year figure was posted at 2.8% (10 bps higher than expected but lower than December’s 2.9%). The core CPI print (which excludes food, energy, alcohol, and tobacco) declined to 3.3% from 3.4% in December but missed investors’ expectations of slowing to 3.2%. Given the no growth, slowing inflation environment, investors still expect the European Central Bank (ECB) to begin cutting rates in April (77% chance of a cut), though ECB President Christine Lagarde has indicated summer is more likely.
  • Lighter but longer: In their quarterly refunding announcement (QRA), the U.S. Treasury expects to issue $760B in debt in the first quarter of 2024 and just $202B in the second quarter. The first quarter estimate is $55B less than estimated last October, and both quarters would result in lower issuance than the $776B borrowed in the final quarter of 2023. Of the $760B expected in the first quarter, $121B is expected to be issued in mid-February in the form of longer-term notes and bonds (3-, 10-, and 30-year), setting a record for longer-term issuance while also expecting the monthly figure to creep higher through April. The Treasury has significantly ramped up the size of longer-term issuance since August 2023 to address “potential changes to the fiscal outlook” and handle their open market redemptions, but they do expect to pare back the longer-term issuance after April. 
Real Assets, Real Insights: This week, we’ll explore continued strong data center leasing trends, a different type of shopping on New York’s Fifth Avenue, a new hold on LNG export licenses, and a bullish outlook on copper.
  • A, I got your data center lease right here (Real Estate):  Global data center leasing continues to shatter records, with over 1,500 megawatts (MW) leased in Q4 2023, surpassing the volume in Q3 (which broke the prior record set in Q2), according to a recent release by datacenterHawk (an industry data provider). Leasing for the full year was dominated by four markets in the U.S.: Northern Virginia (~1/3 of all new data center leases signed in 2023), Atlanta, Phoenix, and Dallas. Artificial intelligence (A.I.) and continued cloud adoption are among the primary drivers of the insatiable demand for data center space. With global vacancy estimated below 5%, users of the space would love to see more availability, but development efforts continue to be hampered by a lack of available power and supply shortages for critical building components. With A.I. adoption just getting started and other data-heavy emerging technologies on the upswing, we would not be surprised to see the leasing record broken again in 2024.
  • Where the devil is Prada? (Real Estate):  A series of recent real estate transactions on New York City’s Fifth Avenue demonstrate that highly desirable retail space still commands premium pricing and that retailers are finding owning their own space fashionable again. First, in late December, it was announced that Prada was buying their NYC flagship location from their landlord, Jeff Sutton, for $425M or over $6,000 per square foot, with much of the value ascribed to the ground and mezzanine store space. Days later, it appeared that the Prada family would also be buying the neighboring property, 720 Fifth Avenue, also from Sutton, for $410M, a price that also equates to over $6,000 per square foot. Then, in January, Kering (the parent company of Gucci) announced they would be buying the retail space at 717 Fifth Avenue for $963M, well over $8,000 per square foot, with likely plans to open a new flagship store, though Armani currently occupies the space. Finally, we will be closely watching 745 Fifth Avenue, where LVMH is rumored to have an interest in the retail space and perhaps the entire building.
  • LNG in legislative limbo (Infrastructure): In a move that could have ramifications for MLPs, storage facilities, and export terminals of natural gas, the Biden administration recently announced a moratorium on issuing any new LNG export licenses until a study can be done to review national security issues, impacts on climate change, and the effect on energy costs for the U.S. While this won’t affect projects that have already received government approval, it will prevent new projects from starting and could cause headaches for projects requiring an extension. Most industry experts expect the pause to be lifted regardless of who wins the November presidential election, though the timing remains an open question. In fact, this move could be short-lived, as the U.S. House of Representatives is already reviewing the matter and plans to hold a near-term vote with the intent of overturning the presidential order.
  • You can’t stop the Copper top (Commodities):  The price of copper has been on the upswing since last October, with the front-month futures contract recently breaking above $8,600/ton. While still far from the $10,000/ton level last seen in April of 2022, there are reasons to believe it could head back that way. Most recently, the collapse of treatment and refining charges received by smelters and refiners indicated an insufficient availability of copper concentrates in the market. In response, some smelters in China are reportedly cutting production, which would reduce refined copper during a period that typically sees seasonal inventory restocking and strong demand. In a move that could temporarily alleviate some of these supply pressures, First Quantum Minerals is looking to sell 120,000 tons of copper concentrate stored in Panama, but recall that the Panamanian government effectively revoked First Quantum’s lease at Cobre Panama, idling one of the largest open-pit copper mines in the world and thereby reducing future supply of copper concentrate. In total, after years of underinvestment, copper supply challenges are clearly mounting, with some 700,000 tons of global production (~3% of world supply) recently removed from 2024 supply estimates.

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