What’s going on in financial markets? Which macro themes should you watch? Drawing on our depth and breadth of market and economic expertise, Market Pulse brings you insights on the latest investment themes to help preserve and grow your wealth. 

Market views

• Central banks are back on investors’ minds. Last week the Bank of Canada reminded us that a pause maybe just that. The Bank hasn’t raised rates since January but increased them last week due to inflation data. In the US, there is speculation that the Federal Reserve will pause at its policy meeting this week. A pause may give some relief, but that is not necessarily the end of the journey. The European Central Bank will also be meeting this week, the expectation is that there will be two further rate hikes of 25bps and cuts starting in 2024. 
• Bond markets have reacted to this little reminder: since the end of May 10-Year yields have moved up by 10bps in the US and euro area. In the background we do have the US Treasury rebuilding its deposit accounts but it’s hard to quantify the impact of this. We need to see firm evidence that inflation is coming under control before we can confirm that interest rates have peaked.
• Equity markets have chosen to ignore the developments in the interest rates markets and focus instead on the thoughts of ‘soft landings’ or ‘no landings’. Since the end of May, world equities are up nearly 3%. Some of this is sector specific (potential for AI to improve productivity and hence earnings going forward) but some of it is related to a more sanguine outlook for economic growth. Analysis could change as the euro area economy is flatlining at the moment, China is losing momentum and the US economy is giving mixed signals. We continue to stress caution. 

Macro views

• US data is still portraying a confusing picture. The latest ISM (business sentiment) surveys painted a weaker picture than the jobs report. The Manufacturing ISM remains in contraction territory dropping to 6.9 and the New Orders subindex was very weak falling 3 points to 42.6. The Services ISM was a bigger disappointment dropping to 50.7, only just in expansion mode. The weakness was across all the sub-indices and the index is back to where it was at the end of last year.  
• There was another weak report from China, although it is saying as much about the rest of the world as it is about China. Trade figures for the country were released and exports were much weaker than expected, down 7.5% year-on-year in US dollar terms. The main weakness was in Asia and the US and predominantly in consumer goods. Exports did get a boost from the reopening as factories went back to full shifts, but that impact is well behind us now and output levels are reflecting weak end demand. Imports did perform better than expected but they were still down 4.5% year-on-year.
• Euro area data was weaker but not as bad as some recent reports. Retail Sales ex motors and food were flat month-on-month, although still down year-on-year, indicating we could be seeing a stabilisation in the switch from goods demand to services demand which has plagued the manufacturing economy over the last 12 months. Of course, if the switch from goods to services is stabilising that means weaker figures from the services side of the economy.

Chart of the week: What a difference a month makes

At the beginning of April, we commented on the narrowness of the performance of the S&P 500, very few shares were accounting for much of the index’s appreciation.  We said at the time that it looked more like a normalisation of trends if we looked at the S&P 500 against the Equal Weighted S&P 500. Fast forward one month and it looks different. The equal weighted index is now at relative lows we have not seen since the height of the pandemic recovery. This should reverse somewhat and when that happens (the grey line goes up), the blue line (S&P 500) finds it difficult to go up.

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