Simplify the complex with clear and concise market insights direct from our investment experts every week.
Equity markets with Bernard Swords, Chief Investment Officer
What were the key data releases last week – and how did they impact equity markets?
- The US inflation reports were the highlight last week and the main driver for financial markets. For the first time this year, we had a pleasant CPI report.
- The core CPI increased by an expected 0.3% month-on-month, but the year-on-year figure dropped from 3.8% to 3.6%, the lowest in three years.
- The PPI report was not as helpful with the core rate moving up to 3.1% year-on-year. This was diluted by Fed Chair Powell reiterating that he does not expect interest rates to be hiked again this cycle.
- Growth data from the US indicated some loss of momentum in April. Industrial production was flat in April; manufacturing output was down -0.3% on the month; and the retail sales report was also softer than expected.
- Outside the US, growth data also missed forecasts. In the euro area, industrial production (excluding the volatile Irish component) was down 0.5% month-on-month and, in China, both retail sales and industrial production growth was less than expected.
- All this weak data is helpful for financial markets at the moment as it increases the probability of policy reaction. In the euro area, it keeps the ECB on track for a cut in June. In the US, it puts pressure on the Federal Reserve to start cutting interest rates. In China, it is prompting further government support.
- This was not lost on markets last week. In euro terms, world equities added nearly 1% to a strong year-to-date performance led by the Asia Pacific region.
- Within equity markets, interest rate-sensitive sectors (Property, Utilities and Financials) were strong but it was the structural growth sectors (IT and Communication Services) that led last week. The cyclical sectors were under pressure and were down over the week. We expect the divergence of performance between structural and cyclical growth to be a continuing theme this year.
Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy
How did fixed income markets fare last week?
- It was a relatively flat week for fixed income markets. Markets rallied mid-week following releases in the US for US CPI and US retail sales but gave up a lot of gains on Thursday and Friday following central bank commentary.
- As outlined above, US CPI was viewed as dovish by the markets while the US retail sales figures showed signs of stagnating this month, further fuelling the weaker growth narrative that has been brewing since non-farm payrolls.
- This led to a drop in rates in the US, with European fixed income yields following suit. What’s more, mid-way through the week, comments from ECB central bankers confirming a rate cut in June helped to support the momentum.
- However, markets seemed to give up quite a lot of these gains on Friday, with the German 10-year and US 10-year retracing higher once more, weighing on performance from earlier on in the week.
- These moves were sparked by a number of things, but one potential driver were the late-week remarks from central bankers, highlighting that although a cut in June from the ECB seems warranted, the pace going forward will be under constant review.
- ECB member Schabel stated that back-to-back cuts are likely off the table. It’s worth noting that she is considered to be one of the hawkish members, and so, comments of this nature are not unexpected.
The week ahead: what to watch out for
It is very quiet on the data front this week. In the euro area, we have sentiment surveys (PMIs and consumer confidence). Will the healing continue in the euro area? In the US, the main item of note will be the release of the minutes of the last FOMC (interest rate setting committee of the Federal Reserve) where we may get some further insight on the thinking of the Federal Reserve Governors.
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