Executive summary:
- U.S. core consumer-price gains eased during December, sparking a rally in bonds
- Q4 earnings season is off to a strong start
- The potential for additional fiscal stimulus in China will be a key watchpoint for investors this year
On the latest edition of Market Week in Review, Director and Senior Investment Strategist Alex Cousley discussed recently released U.S. inflation data as well as the start of U.S. fourth-quarter earnings season. He also assessed the latest Chinese credit numbers and shared key investor watchpoints for China in the months ahead.
U.S. government bonds rally after encouraging inflation report
Cousley kicked off the segment by noting that the December CPI (consumer price index) report for the U.S. was published by the Bureau of Labor Statistics on Jan. 15. The core CPI came in slightly below expectations, he said, rising 0.2% from November versus the consensus forecast for a 0.3% gain. On an annualized basis, the core CPI ticked down to 3.2% in December from 3.3% one month earlier, Cousley added.
“This report was a welcome reprieve for fixed income markets, which have been under pressure since December over concerns that inflation could reaccelerate, which could keep interest rates at higher-than-expected levels,” he explained. Cousley noted that the yield on the 10-year U.S. government bond, which spiked to near 4.8% on Jan. 13, fell sharply in the wake of the report. As of market close on Jan. 16, it stood at roughly 4.62%—18 basis points lower than at the start of the week, he said.
“Overall, we still think that U.S. bonds look fairly attractive from a valuation standpoint—and we believe they still have a very strong role to play in a multi-asset portfolio,” Cousley remarked.
The early read on Q4 earnings season
Next, Cousley discussed U.S. fourth-quarter earnings season, which kicked off earlier in the week with some big banks reporting. He said that so far, most banks have delivered better earnings than expected, with some also announcing large stock buyback programs.
“Generally, banks have also been reporting an improving outlook, which has been encouraging news for the financials sector,” Cousley said.
While the overall U.S. earnings season is still in its early days, growth expectations for Q4 are quite robust, at around 5% if the Magnificent Seven tech names are excluded, he noted.
What do the latest credit numbers from China suggest?
Cousley wrapped up with a look at the growth environment in China, which he noted remains fairly soft due to struggles in the country’s property market as well as weak consumer confidence. “The combination of the two has put the Chinese economy at risk of deflation,” he said, adding that the latest inflation numbers from China have been very weak.
However, Cousley noted that since the start of December, there has been a pickup in the amount of property transactions. “The Chinese government has been trying to encourage more of this over the last six months, and—at least in the very near-term—it does look like we’re starting to see a bit of an improvement in this area,” he stated. In addition, the latest credit numbers also showed a very small uptick in mortgage lending, pointing to an improvement in mortgage demand, Cousley noted. All that said, it’s probably still too early to conclude that China’s embattled property sector has bottomed out, he remarked.
Looking ahead, Cousley said he thinks the key focus for investors this year will remain around fiscal policy. “At Russell Investments, we’ll be watching to see if the Chinese government announces any additional stimulus,” he said, noting that several big meetings are looming, including the National People’s Congress in March. It’s at this meeting that the government will likely unveil the economic growth target for 2025, Cousley noted. Another important watchpoint for China will be whether any potential tariffs are imposed by the incoming U.S. administration—and how the government responds, he added.
“Overall, while there are a few small green shoots emerging, I expect stimulus to be the main focus for China in the year ahead given the economic situation,” he concluded.