Global Market Snapshot - October 2024

Market Review

Global markets rally on rate cuts from the Federal Reserve and People’s Bank of China

While September is historically the worst month for equities, the MSCI All Country World Index ended September up 2.5%, its best return since 2013. During the month, global monetary policy was the largest macro driver for markets.

Just days after the Federal Reserve (Fed) cut its policy rate by 50 basis points (bps) to “recalibrate” monetary policy, the People’s Bank of China (PBOC) surprised investors with several actions to stimulate China’s slowing economy (Figure 1). The MSCI Emerging Markets Index had its best month since November 2023 and marked the widest outperformance over its global large-cap counterparts since November 2022.

Figure 1. Monetary Policy Phases
While the Fed recently moved to Phase IV, the PBOC has just entered Phase III.

Source: As of 8/31/2024. Source: Bloomberg L.P.

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Interest rates continued their multi-month decline, with the 10-year U.S. Treasury (UST) yield declining for a fifth consecutive month. Notably, however, the 10-year interest rate rose by 8 bps through month-end following the Federal Open Market Committee (FOMC) meeting, which illustrates how Fed policy has far less influence on long-term rates than short-term rates. Markets now expect the Fed to continue to cut rates throughout 2024 and 2025, which should lead to declining money market yields (Figure 2). Despite the decline in UST yields, credit spreads were essentially unchanged month over month, with both investment grade and high yield corporate credit spreads well within their long-term ranges. 

Figure 2. Fed Funds Rate
As the fed funds rate continues to fall, cash yields are expected to follow suit.

As of 9/30/2024. SourceL Bloomberg L.P.

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Theme of the Month

A September to remember for global monetary policy

Unlike September, which is a notoriously challenging month for equities, the fourth quarter is historically the strongest period of the year. In fact, there have only been four, fourth quarters of negative returns in the past 20 years. We expect the Fed’s recalibration of monetary policy and the PBOC’s ability — and willingness — to provide support to China’s economy to be key drivers for markets in the near to medium term.

The outcome of the FOMC’s September meeting delivered several surprises for investors. Heading into the meeting, investors were divided among expectations for either a 25- or 50-bp cut. Those expecting a smaller cut viewed a change in policy as a nod to the Fed’s progress on inflation and a return to pre-pandemic economic trends, while expectations for a larger cut stemmed more from recent labor market weakness. Ultimately, the Fed took the more aggressive approach with a 50-bp cut; however, it was not accompanied by a bearish economic outlook. In his comments, Fed Chair Jerome Powell highlighted evidence of falling inflation across most measures and described the 4.2% U.S. unemployment rate as “healthy.”

We believe the Fed’s decision to cut rates was based on its expectations for the business cycle next year, instead of a reaction to the current state of the economy. Just as interest rate hikes have a lagged effect on the economy, a similar outcome occurs with interest rate cuts. As recent data shows slowing economic growth, we interpret the aggressive September rate cut as the Fed “getting ahead” of potential weakness. Notably, there were no material changes to the Fed’s interest rate projections — the “dot plot” still shows multiple rate cuts in 2024 and 2025. In our view, the projected cuts should continue to ease financial conditions. In light of September’s rate cut, we believe equity valuations could further expand and credit spreads could tighten. With valuations already above their 10-year averages, we will be paying close attention to third quarter earnings reports and management guidance, particularly around profit margin expansion. As of September 30, the third quarter consensus earnings growth estimate for the S&P 500^® was 4.5%, but excluding the “Magnificent 7” stocks, expectations weaken to a mere 1.5%.

That said, we are more concerned with the 4.5% consensus estimate for revenue growth ex-Magnificent 7, since it suggests profit margins may remain pressured. Falling inflation can reduce companies’ pricing power and expose the challenges many industries face as global economic growth remains stagnant. It will likely take multiple quarters before the Fed’s monetary policy changes begin to show up in earnings growth and margin expansion.

Meanwhile, the PBOC’s late-September announcement of multiple interest rate cut actions came as a welcome reprieve for investors and boosted sentiment with a significant jump in equities in China, at month-end. In the months leading up to the announcement, equity valuations had fallen to their near-lowest levels since the pandemic. Following the announcement, the MSCI China Index delivered its best weekly return since 2008, and the yuan strengthened to its highest level relative to the U.S. dollar in more than a year.

While both central banks enacted rate cuts during the month, we believe there is a marked distinction between the Fed’s easing actions and those of the PBOC given the health of the respective economies. We believe the Fed is attempting to ease monetary policy to extend the business cycle, whereas the PBOC is seeking to inject stimulus into a stagnant economy (Figure 3). While central bank actions can influence investor sentiment and equity prices, we believe a sustained recovery in China’s business cycle likely requires a more direct-to-consumer act of fiscal stimulus.

Figure 3. Economic Data Comparison
The Fed is easing to "recalibrate" the cycle, whereas the PBOC is looking to reignite China’s economy

	United States	China
Policy Rate	5%*	1.5%**
Money Supply Growth	-0.8%	-7.3%
Industrial Production	0.0%	4.5%
Unemployment Rate	4.2%	5.3%
Core CPI	3.2%	0.3%
Stock Market P/E	21.5x	8.9x
Consensus Earnings Growth Estimate - 2025	14.9%	10.4%

*fed funds rate.**7-day reverse repo
As of 9/30/2024. Source: Bloomberg L.P.

Overall, we continue to find emerging market (EM) equities attractive relative to their developed market counterparts as the long-term economic growth outlook for EM remains much stronger. Additionally, commodity markets across several industries, such as energy and industrial metals, remain attractive for net-export EM countries and stand to benefit from global monetary easing. Looking ahead, the extent of the late September EM rally remains highly dependent on fiscal support in China, and ultimately, how that stimulus flows into corporate earnings.

For more information, please contact your PNC advisor.

 

TEXT VERSION OF CHARTS

Figure 1. Monetary Policy Phases
While the Fed recently moved to Phase IV, the PBOC has just entered Phase III.Inflation falls for the first time since 2020 (view image)

Phase I: Easy financial conditions, but tightening.

Phase II: Tight financial conditions, and tightening.

Phase III: Tight financial conditions, but easing. “The PBOC recently entered Phase III.”

Phase IV: Easy financial conditions, and easing. “ The Fed is now  firmly in Phase IV”.

Figure 2:  Fed Funds Rate 
As the fed funds rate continues to fall, cash yields are expected to follow suit. (view image)

Date	Fed Funds Rate	Consensus Estimate
9/2021	0.0025	-
1/2022	0.0025	-
9/2022	0.0325	-
1/2023	0.045	-
9/2023	0.055	-
1/2024	0.055	-
9/2024	0.05	-
1/2025	-	0.04
9/2025	-	0.03

Source: As of 9/30/2024. Bloomberg L.P.

Figure 3:  Economic Data Comparison 
The Fed is easing to "recalibrate" the cycle, whereas the PBOC is looking to reignite China's economy. (view image)

	United States	China
Policy Rate	5%*	1.5%**
Money Supply Growth	-0.8%	-7.3%
Industrial Production	0.0%	4.5%
Unemployment Rate	4.2%	5.3%
Core CPI	3.2%	0.3%
Stock Market P/E	21.5x	8.9x
Consensus Earnings Growth Estimate - 2025	14.9%	10.4%

*fed funds rate. **7-day reverse repo
Source: As of 9/30/2024. Bloomberg L.P.