Investment Viewpoint: eurozone PMI and central bank minutes in focus

Written by Bernard Swords, Chief Investment Officer, and Elizabeth Geoghegan, Head of Fixed Income Strategy

26 February 2024

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Equity markets with Bernard Swords, Chief Investment Officer 

Earnings season and eurozone PMI data were in focus last week. How did markets react – and what does it mean for our positioning? 

  • Equity markets were meandering last week until Nvidia reported its Q4 results, which were very impressive. Indeed, they caused a turnaround in the company’s share price, the sector and market performance.
  • Comments made by Nvidia chief executive Jensen Huang garnered much media attention when he said that demand for AI is “surging worldwide across companies, industries and nations”. We have exposure to the AI theme through some of our holdings in Industrials, Financials and Healthcare where the sentiment is not as extreme. We have a slight underweighting in IT which needs to be reviewed if the build out for AI adoption has had a step up.
  • In the euro area, there was some relief following the release of the main business sentiment index, the composite PMI. It moved back towards the all-important 50 mark this month, indicating stability in activity. This is being driven by improvements outside the big two (France and Germany) which are still struggling.
  • Outside of the big two, the composite PMI is quite healthy, with a reading of 52.4. At a sector level, Services is showing the biggest improvement, with a reading of just under 50 for the region as a whole.
  • We are overweight the euro area in our equity portfolio more as a result of being negative on the Pacific Basin rather than being particularly positive on the euro area. However, we did think the economic momentum had to turn at some stage – and perhaps, we are now seeing the first signs of it.

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

How did markets react to the FOMC and ECB minutes last week – and what does this mean for our fixed income view?

  • Fixed income market yields continue to slowly grind higher, continuing the trend since the start of the year. The moves come following various economic releases, including ECB wage data, but a key focus last week was the release of both the FOMC and ECB meeting minutes. The comments by both central bankers were somewhat differentiated when speaking about the growth outlook, but where they were quite well aligned was around the commentary that it is too early for rate cuts.
  • In previous editions of Investment Viewpoint, I have touched on the need for markets to reflect more realistic rate cut expectations in terms of central bank pricing. However, the recent moves have resulted in more realistic and fair expectations relative to what central banks are saying.
  • At the end of the year, US and European markets were pricing six to seven cuts for 2024, whereas today they are pricing just over three in the US and between three and four in Europe.
  • In this way, even though the slow rise in yields has continued year to date, one could argue that, that the drivers of the moves (repricing of central bank expectations) are potentially starting to slow.
  • This is positive for our duration view. Had markets continued to expect a sizeable number of cuts it would mean that you would need something significant to happen in economies for fixed income to really do well. The fact that market expectations are more realistic today also helps to remove headwinds such as overly expensive valuations.
  • Overall, the repricing that we’ve seen today is more encouraging from an asset allocation perspective. Markets are now priced in a way which acknowledges the progress in disinflation trends, while not ignoring the signs of residual strength in developed market economies.

The week ahead: what to watch out for

Inflation statistics take centre stage next week. On Thursday we will have the PCE data from the US. This is the measure of inflation that the Federal Reserve follow more closely. The CPI has been relatively sticky in recent months so we will be watching to see if this occurs in the PCE data as well. We also have the inflation report from the euro area on Friday. Inflation has been better behaved in the euro area of late and we hope to see that continue.  

Taking the temperature on global economic growth, we get business sentiment surveys. From the US we get the ISM Manufacturing Survey and from China we get the PMI surveys. 

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