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Equity markets and macro insights with Bernard Swords, Chief Investment Officer
What drove the performance in equity markets last week?
- It was a strong week for equity markets; the world index was up 2.5% in euro terms. The US GDP report put a cloud over equity markets – the prospect of lower growth and persistent inflation is not one to give cheer. However, earnings news outweighed the impact.
- The IT and Communication Services sectors took centre stage: three of the mega caps released their quarterly results. The adoption of AI was the big theme, but they were also indicating a robust demand background.
- Both Microsoft and Alphabet (Google) spoke about strong demand for their cloud services as companies continue to invest to permit the use of AI tools. But Alphabet also experienced very strong demand for advertising indicating a healthy local economy.
- It was not all ‘sunshine’ Meta Platforms disappointed investors as it outlined the cost of investing to increase the usage of AI tools. The strong Microsoft and Alphabet results pushed the IT sector to the top of the performance table and, despite Meta’s weak results, Communication Services were next. At the bottom were the Commodity sectors (Energy and Materials).
- Back to the US GDP release, it showed that economic growth was well behind forecast levels. The annualised growth rate in the first quarter was 1.6% against an expected level of 2.5%. Growth in all the major components (consumption, investment and government) was slower than expected. On the positive side, there was a drawdown in inventories which took 0.3% off the growth rate which should yield some bounce back in future quarters.
- As if that news was not disappointing enough the inflation data was stronger than expected. Core PCE, the inflation measure that the Federal Reserve watches, jumped to an annualised rate of 3.7%. This mix of slower growth and higher inflation suits neither bonds nor equities. It must be remembered that the GDP data is prone to quite large revisions so the story could change.
Numbers from Europe showed evidence of recovery last week- what did they tell us?
- The main business surveys, the Purchasing Managers' Indices (PMIs), were released in Europe last week and they confirmed an improving trend.
- The composite index jumped to an 11-month high of 51.4, which was better than expected and well into expansion territory. All the improvement is coming from the services sector with its PMI rising to 52.9.
- The manufacturing survey on the other hand barely moved and remains stuck in contractionary territory at 47.3.
- Since March there has been a change in sentiment towards the European economy as data releases have indicated a halt to the deterioration. This release supports this change, but it does not indicate boom conditions in the European economy, just a slow start in a recovery process.
The week ahead: what to watch out for
The Federal Open Market Committee (FOMC) meeting is at the top of the agenda this week. Will the Federal Reserve support the recent changes in interest rate expectations? There will also be a lot of data releases. In the euro area we get the Consumer Price Index report, Q1 Gross Dosmestic Product (GDP) and Consumer Confidence. Will inflation continue on its softer path in the region? In the US, the leading figure will be the Payrolls number on Friday.
Other important releases include the ISM Manufacturing and non-Manufacturing surveys and Consumer Confidence. After a weak GDP figure, will these releases reassure investors about the health of the US economy? We also get the PMIs from China. Last time out these had improved, can the momentum be maintained?
