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

• Governor of the Dutch Central Bank, Klaas Knot, made some interesting comments in an interview last week. Knot is an influential member of the European Central Bank’s (ECB) governing council and one of its ‘hawkish’ members. On raising interest rates, he stated: “For July it is a necessity, for anything beyond July it would at most be a possibility, but by no means a certainty”. Two further increases were regarded as a forgone conclusion by the markets but after those comments it looks like we are much closer to the peak in rates in the euro area than we thought. Good news for the fixed income market.
• The UK’s most recent inflation report was pleasantly surprising with core inflation dropping to 6.9%. The consensus expectation was for it to remain above 7%. After the inflation report, UK 10-year yields dropped 20bps and FTSE 100 is up almost 3% during the week. However due to the drop in interest rate expectations, Sterling was weaker diluting the returns. This would encourage caution when reassessing the outlook for returns in UK assets. A lot of what you gain in higher asset prices you could end up losing on the exchange rate.
• We are at very early stages in the reporting season and so far, indications are that returns will be reasonable. We must bear in mind that the expectations were reduced over the last couple of months, so the bar has been adjusted. Still the number of companies beating forecasts is in line with averages. The size of the beat is relatively high, Earnings Per Share (EPS) is running 7% above expectations. However, we feel a good earnings season is needed to hold equity markets where they are.

Macro views

• Data released in the US last week showed a robust consumer and a struggling manufacturing sector. Core Retail Sales beat expectations this month and there were upward revisions to the previous month’s sales levels. Retail Sales are now up 5% year-on-year. Interestingly, there was strong growth in the on-line segment. This could indicate some stabilisation in goods demand which could start to help steady the manufacturing sector in the second half of the year.  
• Speaking of the manufacturing sector, data released from US Industrial Production was disappointing. Production was down 0.5% month-on-month, but still positive when compared to year-on-year numbers. The skew of consumption towards services rather than goods and the draw down of inventories is still weighing on the manufacturing sector, however the US Retail Sales report indicates that that could be changing.
• After many weeks of weak data from the euro area and China, forecasts are beginning to react. Over the last couple of weeks some of the major investment banks (JP Morgan; Bank America Merrill Lynch; UBS) have reduced growth forecasts in these regions. For 2023 China is expected to grow just over 5% and the euro area estimated to grow somewhere around 0.5%. Unfortunately, 2024 is not expected to be much better with subpar growth predictions in China at 4.8% and about 0.7% in the euro area.

Chart of the week: Do not give up

Since the end of February, the euro area equity market has had a tough time against the US. There are many factors, but relative economic performance has been a contributor. In the chart above we look at the relative performance of euro area equities and the gap between the Economic Surprise Indices for the two regions (blue line). When this is above zero the euro area economy is performing better relative to expectations than the US and euro area equity market generally out-performs. The gap is currently well into the negative. In fact, it is so low now that it is likely to start improving, which should bring some stability to the relative performance of the euro area.

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