Simplify the complex with clear and concise market insights direct from our investment experts every week.
Markets and macro views with Bernard Swords, Chief Investment Officer
Bond and equity markets registered losses in April – what drove this?
- The main driver of this was another resetting of interest rate expectations in April. Financial markets were giving a very low probability of any interest rate cut in the US in 2024.
- This pushed bond yields up across the globe causing a loss of almost 1.5% in the euro area bond market, while world equities fell over 2.5% in euro terms.
- It could have been worse for equity markets except that quarterly results in a few key sectors were well ahead of forecasts.
- For us, these corrections in financial markets are welcome. Sentiment, in particular in the equity market, had run too far. Indeed, post the change in interest rate expectations we are as likely to get surprises on inflation and interest rates as we are disappointments.
- Meanwhile, the outcome of the FOMC (the interest rate setting committee of the Federal Reserve) gave markets a little bit of cheer. 10-year yields fell about 10bps in the euro area and US.
- On the negative side, Fed Chair Powell acknowledged that the recent inflation data means that it will take longer for the Federal Reserve (Fed) to achieve the confidence it needs to start reducing interest rates i.e. a later date for the first interest rate cut.
- But there were positives: the Fed will reduce the rate at which it will be selling bonds going forward improving liquidity conditions and, as our chief economist Dermott O’Leary put it: “Chair Powell tried to reassure markets that the next move would indeed be down.” While this may seem ‘small comfort’, affirmation that the next step in monetary policy is easing should continue to give some support to financial markets.
- Meanwhile, some recent data releases from the US indicated some softening in the US economy. The jobs report showed fewer jobs created than expected. Although at 175,000, the labour market is still fairly healthy.
- The main business surveys (the ISMs) were also released with both dipping below 50 indicating contraction in activity. The Manufacturing survey has been hovering around 50 for the past year, so this is not out of trend. The non-Manufacturing survey has dipped below 50 once before only to bounce back the next month, so we will have to wait and see if there is a change in conditions here. For the moment, markets are seeing it as a cooling in the economy rather than a major slowdown which brings interest rate cuts back on the agenda.
Earnings season is in full swing in the US and euro area – what have the key takeaways been so far?
- We are roughly 75% of the way through the earnings season in the US and halfway through it in the euro area.
- In the US, we have returned to year-on-year growth in earnings. For companies that have reported, earnings are up 4% year-on-year which is nine points higher than forecast going into the results season.
- It is narrow based – three sectors (IT, Communication Services and Consumer Discretionary) are making up the bulk of the surprise.
- Guidance is also much stronger in this quarter. Almost 40% of companies that have reported have increased guidance against 10% that have cut guidance.
- In euro area, the earnings picture is not as strong, they are still declining on a year-on-year basis and the outcome is not much different to forecasts.
- For the companies that have reported, so far earnings are down 15% which is 1% better than expected. Sectoral mix is an important feature here – there is low exposure to the new economy, but a weaker economic background is also feeding in.
- So far, you would have more comfort that consensus forecasts for 2024 earnings will be met but it is because the ‘new economy’ is doing very well rather than a broad-based surge in earnings.
The week ahead: what to watch out for
Data releases are sparse this week. In the euro area, we have the PPI release. What will it say about the trend in inflation pressures in the euro area? Retail Sales will also be released in the region. Meanwhile, in the US, the University of Michigan Consumer Confidence survey will be released – will it be as weak as the Confidence Board’s survey?
This is a marketing communication.
