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 bank policy meetings were the focus for both equities and bonds last week with outcomes coming close to expectations. Interest rates were left unchanged in the US, increased by 0.25% in the euro area and no change to policy in Japan. Equity markets continue to move up, world equities up another 1.1% last week but bond markets under some pressure and 10-Year yields were up 10bps during the week. While decisions from the meetings were in-line with anticipations, the forecasts indicate more rate rises than thought.
• The surprise from the Federal Reserve’s meeting was the increase in the ‘dot plot’, the projections by committee members of where they think interest rates will go over the next three years. This now suggests that interest rates will rise another 50bps rather than the 25bps assumed before the meeting. Inflation is not coming down fast enough and the economy is more resilient than expected. From the European Central Bank the most noteworthy point was the increase in inflation forecasts. It now expects core inflation to reach 5.1% in 2023 and 3.0% in 2024. That is above target, so the rate hikes will be continuing.
• The outcome of the central banks meeting does not change our outlook. Inflation remains the main concern for the central banks and if they need to push economies close to recession to bring it down, they will do so. We still think markets are being too optimistic about interest rates being cut in the first half of next year and being too complacent about the economic growth outlook. Remain cautious.

Macro views

• Inflation data from the US was modesty encouraging. The Producer Price Index dropped month-on-month. The core rate of Producer Price inflation dropped to an annual rate of 2.8%, the lowest level since the start of 2021. The Consumer Price Index was not as benign. The core rate of inflation did drop, from 5.5% year-on-year to 5.3% but still stands well above the target rate. One good element of the CPI report is that the inflationary pressure is becoming more concentrated.
• The manufacturing economy continues to struggle. Industrial Production figures from the euro showed it declined (ex-Ireland, which is extremely volatile from month to month) 1% in each of the last two months. In the US Industrial Production looked like it was on a recovery path but last month it dropped 0.2% month-on-month. Part of the reason for the struggling manufacturing sector is the switch of demand to services once the pandemic restrictions were lifted. However, we are well past the start of the reopening following Covid-19 and this excuse for a weak industrial sector is looking somewhat jaded.
• Consumption is performing somewhat better, but it is also losing some momentum. In the US, core Retail Sales growth dropped from 0.6% month-on-month in April to 0.2%. Retail Sales growth ramped up in China after the lifting of pandemic restrictions but is now also slowing. In April, the year-on-year growth rate was 18.4% and dropped to 12.7% in May. After a good start to the year, data suggests the global economy is decelerating.

Chart of the week: Some hope

The Consumer Price Index report released in the US last week was fairly well received. The overall figures were in line with expectations but the behaviour of some of the components were agreeable. Two of these (shown above) had been running ‘hot’ and proving very sticky, but they are now decelerating. Core Services inflation was boosted by the switch to services consumption following the U.S. post Covid-19 reopening but it has dropped over 1.5% on an annualised basis in three months. The cost of shelter (rent) has been up every single month until this report. The drop in core shelter inflation was small but the belief is that this is the turning point.

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