Market index returns

Week to date since January 3, 2024 as of January 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.

• Will the Fed “cut” to the chase: The U.S. received some mixed messaging on inflation this week. First, the December Consumer Price Index (CPI) came in a bit hotter than expected and accelerated from the prior release on both a monthly and annual basis, which were reported at 0.3% and 3.4%, respectively. Core CPI (which excludes food and energy) met expectations and was unchanged at 0.3% on a monthly basis, while the year-on-year print of 3.9% was just ahead of expectations and dropped 10 bps from November’s report. The following day, Producer Price Index (PPI) data was better than expected, declining from the prior release on a month-on-month basis with a headline print of -0.1% and core at 0.0%. Year-on-year prints were better than expected but did accelerate slightly from November, with headline at 1.0% and core at 1.8%. Following the release of both, investors have increased their expectations for the U.S. Federal Reserve to begin cutting rates in March, with the futures market now implying an ~80% chance of a cut at that meeting.
• Maybe the third time’s the charm?: With the January 19th expiration of one of the two continuing resolutions (CRs) quickly approaching, the U.S. Congress is back in negotiating (and bickering) mode. While House Speaker Johnson previously promised there would be no more CRs this fiscal year, it appears that another short-term fix may be in the works. Speaker Johnson, a Republican, appears to be willing to compromise with Democrats on spending measures, but a small, extreme faction within his own party seems to be the primary holdup, having already sunk a procedural vote on rules earlier this week in protest of the Speaker’s bipartisan negotiating efforts. Every day that passes without a CR, full bill, or even an agreed plan further risks a partial government shutdown before the end of the month. Hopefully, this situation can be resolved soon, as the second CR expires just two weeks later on February 2nd.
• Political hot potato: This year will see major elections in several of the world’s countries, with estimates that these areas represent between 50% and 70% of the earth’s population. These include the U.S., the UK, the EU, India, Mexico, Russia (any guesses on the winner there?), and several others. Perhaps one of the most important is occurring in Taiwan this weekend. The current front-runner is Lai “William” Ching-te of the Democratic Progressive Party (DPP). While there is still a chance that an opposition party candidate could prevail, a win by the DPP would signal the people’s aggregate will towards separation from China, a move the Chinese government would strongly protest. While there are still many unknowns, this could escalate China’s aggressive stance towards Taiwan, a move that would have global ramifications. While we put low odds on a full invasion of Taiwan, estimates suggest this tail risk could cost the global economy $10T or about 10% of global GDP. For more on this and other political insights, we encourage you to read the most recent blog of Senior Political Strategist for DWS, Frank Kelly.
• Showdown in the Red Sea: As we write, the U.S. and the UK have launched multiple strikes on Houthi targets in Yemen. This follows increasingly frequent attacks in recent weeks by Houthis on merchant vessels traveling through the Red Sea and attacks on U.S. military personnel in Iraq and Syria. The Houthis, which are believed to be backed and trained by Iran, claim they are only targeting Israeli-owned vessels in protest of the Israeli invasion of Gaza and have vowed to retaliate for the strikes in Yemen. Iran itself recently seized an oil tanker off the coast of Oman and sent a warship to the Red Sea. While we will be monitoring how this situation unfolds, in the immediate aftermath of the U.S. strikes, crude oil prices jumped by about 4%, and we have previously noted the increased shipping costs and delays as some shipping companies are choosing to sail around the African continent rather than risk traveling the Red Sea.

• An office building goes back to school (Real Estate): An office campus on the west side of L.A. jointly owned and redeveloped by two listed REITs was recently sold to UCLA. Hudson Pacific Properties (office) and Macerich (regional malls) sold One Westside and Westside Two to the Regents of the University of California for $700 million. Initially built as an enclosed mall and named Westside Pavilion in 1985, the property was extensively redeveloped in recent years to provide flexible, tech-oriented office space and was mostly leased to Google through 2036. However, Google never occupied the space, and UCLA now plans to convert the complex to a medical and engineering research center. While the pricing of over $1,000 per square foot appears to be welcome news for office owners and may demonstrate resilient demand at healthy price points for high-quality new space, it might not be a fair comp given its unique attractiveness to UCLA, based on the property’s flexible design and proximity to their main campus in nearby Westwood, and the likely large lease termination fee from Google. 
• Neither snow nor rain nor heat… (Infrastructure): We’re not talking about the mail carrier, but rather utility companies. With many of our readers sitting out the winter storm and a polar vortex crossing the U.S. this weekend, we note that extreme temperatures in either direction can result in increased loads (i.e. more heating or more air conditioning), which can create inordinate stress on the grid. Damage from storms can lead to lost revenue due to outages and create expensive repairs for the utility, as well as inflict reputational damage due to the harm borne by its consumers. The Department of Energy estimates that power outages cost the U.S. economy up to $70B annually. The good news is regulated utilities are working hard to improve grid resiliency and create on-demand sources of electricity generation, which should support their growth in the foreseeable future. This growth will be funded in part by the Infrastructure Investment and Jobs Act of 2021, which sets aside ~$65B for investment to “upgrade our power infrastructure to deliver clean, reliable energy across the country.”
• You CAN grow money on trees (Natural Resources): That is, if you hold timberlands or the stocks that own them. Lumber and board prices have bounced off their 2023 lows; while perhaps not out of the woods yet, prospects appear to be improving. Single family home construction is among the largest end uses of lumber, and U.S. privately‐owned housing starts in November (the most recently available data) increased to 1.56M on a seasonally adjusted annual basis, nearly 15% higher than the month prior and over 9% higher than the prior year. Permits for starts also increased, and when coupled with mortgage rates receding from their recent highs, demand may increase as new homes become more affordable. An uptick in lumber usage could provide a catalyst for the timber companies as 2024 progresses.
• “Cane” sugar repeat its 2023 performance? (Commodities): After being one of last year’s top-performing commodities, sugar is back at it in 2024, having risen over 4% already. We’ve recently seen some bullish developments for the sweetest commodity, driven mainly by rising supply concerns in Australia, Thailand, and India. Severe flooding across Australia’s far northeast last month has washed away sugar crops (and damaged key rail infrastructure), which will likely lead to production losses. Thailand’s Sugar and Cane Board has cut this year’s production forecast by about 15% from last year, and in India, while the production outlook is slightly better than last year, courts are reviewing the validity of the government’s decision to bar the use of sugar cane juice and B-molasses to produce ethanol, which could have negative implications for sugar supplies. In addition to these developments, we will be closely watching weather dynamics in Brazil, which leads global sugar production.