A Small Relief

Here are some of the biggest stories from last week:

• US inflation was slightly cooler than expected in April.
• UK wage growth remained persistently strong in the first three months of the year.
• Japan’s economy contracted last quarter.
• S&P 500 companies are on track to report their best quarterly earnings relative to expectations in two years.
• Wholesale prices of the world’s second-most popular coffee variety surged to their highest level in nearly half a century.

Dig deeper into these stories in this week’s review.

Macro

All eyes were on this week’s latest US consumer prices report, which showed inflation was, by the slimmest of margins, a bit cooler than anticipated in April. The annual pace of inflation ticked down slightly last month to 3.4% from 3.5% the one before. Meanwhile, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, fell to 3.6% – its lowest level in three years. On a month-over-month basis, headline and core inflation both dipped to 0.3%, from 0.4% the month before. 

Of all four figures, only the monthly headline inflation number came in slightly below expectations, while the rest were all in line with economist forecasts. But that was still a relief considering that the previous four reports all came in hotter than expected, and was enough to send US stocks to a record high as traders increased their bets on rate cuts this year. They now expect the Fed to lower borrowing costs twice in 2024, up from just one priced in earlier this month. However, while the figures offer the central bank some hope that inflation is resuming its downward trend, officials will probably want to see further evidence of it falling to gain the confidence they need to start cutting interest rates.

Across the pond, new data this week showed UK wage growth remained persistently strong in the first quarter, defying predictions for a slowdown. Average annual growth in regular earnings, excluding bonuses, came in at 6% in the three months to March. That was unchanged from an upwardly revised estimate for the three months to February, and higher than the 5.9% forecast by economists. Growth in earnings including bonuses, meanwhile, also remained steady at a more-than-expected 5.7%. But despite the strength in earnings, the data also showed a softening labor market, with the unemployment rate ticking up slightly to 4.3%. All in all, the mixed figures will do little to resolve divisions between Bank of England members, who voted seven to two last week to hold interest rates at a 16-year high of 5.25%.

Finally, over in Japan, new data this week showed the world’s fourth-biggest economy had a disappointing start to the year after contracting in the first three months. Japanese economic output declined by a worse-than-expected 0.5% last quarter from the one before, driven by a 0.7% slump in household spending, which makes up more than half of Japan’s GDP. That marked the fourth consecutive quarter of declining consumer spending – the longest downward streak since early 2009. The dip in GDP came after the economy saw no growth in the fourth quarter and fell by 0.9% in the July-September period. Put differently, the Japanese economy has failed to grow since the spring of last year, which will only add to the central bank’s challenges as it tries to raise the country’s ultra-low interest rates.

Stocks

As the first-quarter earnings season nears its conclusion, investors can breathe a big sigh of relief, with the US's largest companies on track to report their best quarterly earnings relative to expectations in two years.

Of the 459 companies in the S&P 500 that have already reported their results, 59% have surpassed revenue forecasts and 78% have beaten earnings expectations, according to Bloomberg. What’s more, they’ve posted profits that were, on average, 8.4% better than predicted – the best performance relative to expectations in two years. Further adding to the good news, the firms have so far reported earnings that are, on average, 5.4% higher last quarter than the same time last year, marking the fastest growth rate since the second quarter of 2022.

Companies’ expectation-busting results come down to two main things. First, analyst expectations for year-over-year earnings growth, at 3.2%, were probably too conservative heading into the reporting season. That’s similar to what happened in the fourth quarter of 2023: analysts had anticipated an underwhelming 1% uptick in S&P 500 earnings, but the actual figure turned out to be over 8%.

Second, management teams’ concerns about a recession are also contributing to the notable outperformance. Companies are shoring up their bottom lines – cutting expenses and stockpiling cash – to stave off the impacts of a potential economic slowdown. That focus on cost control explains why firms are handily beating profit forecasts while reporting revenues closer to expectations, with companies posting sales that were, on average, just 1% better than predicted last quarter.

All in all, the surprisingly good profit trend is helping to keep the S&P 500’s year-to-date rally alive. It’s also prompting analysts to bunk up their earnings forecasts for the current quarter at the fastest pace in two years, suggesting that the worst of Corporate America’s profit slump may be firmly in the rear-view mirror.

Commodities

Following record-high cocoa prices that alarmed chocoholics, coffee lovers are now equally concerned after the price of a popular variety soared to a 45-year high. A new report by the International Coffee Organization showed that a wholesale price index for robusta beans, which account for around 40% of global coffee consumption, rose by 17% in April from the month before to hit its highest level since 1979. That’s mainly down to supply issues, as hot and dry weather ravages coffee crops in Vietnam – the world’s biggest producer of robusta beans.

A big part of this year’s crop failures, from cocoa to coffee, comes down to the powerful climate event known as “El Niño”. The weather phenomenon results in wetter conditions in the southern part of the US, but creates drier and hotter weather in much of the rest of the world. On top of disrupting crop yields and increasing commodity-price inflation, the event can dent economic growth (particularly in Australia and emerging economies), strain power grids, exacerbate public health crises, hit supply chains, and more.

Next week

• Monday: China one-year loan prime rate. Earnings: Palo Alto Networks, Zoom.
• Tuesday: Eurozone trade balance (March). Earnings: Xpeng.
• Wednesday: Japan trade balance (April), UK inflation (April), US existing home sales (April), minutes of the Fed’s latest meeting. Earnings: Nvidia, Snowflake, Synopsys.
• Thursday: US, UK, Japan, eurozone PMIs (May), US new home sales (April). Earnings: Medtronic, Intuit.
• Friday: Japan inflation (April), UK retail sales (April), eurozone consumer confidence (May), US consumer sentiment (May), US durable goods orders (April).