Investment Viewpoint: how did markets react to the FOMC meeting minutes?

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

27 May 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

What were the key messages from the FOMC meeting minutes - and how did they impact equity markets?

  • The minutes from the Federal Open Markets Committee (FOMC) meeting were released and it was no surprise that the committee was not pleased with the current lack of progress on inflation. 
  • What caught markets off-guard was the statement that “various participants mentioned a willingness to tighten policy” if warranted by the data. Fed Chair Powell was very clear that no further interest rate increases in this cycle would be warranted.
  • The belief was that monetary policy was regarded as so tight that even if there was some deterioration in the data, policy would not be changed. The minutes showed that there is a body in the committee that thinks differently. Higher for longer is back on people’s minds.
  • Reaction to the FOMC minutes dragged markets down, but overall losses remained modest. The interest rate-sensitive sectors (Property, Utilities and Financials) were the weakest sectors, re-enforcing the view that it was interest rate sentiment that dominated.
  • Meanwhile, there was some relief from strong Nvidia results, but this only supported the IT sector which rose over 3% last week. Equity markets are due some period of consolidation so we would not get overly concerned about last week’s movements. 
  • Sentiment about US interest rates is now poor and softer economic data from the US could turn this around quite quickly. The Nvidia results shows that the economic growth that is being delivered is not broad based, so the structural growth sectors are still the best place to be.
  • Elsewhere, the euro area's Purchasing Managers Index (PMI) report showed the composite index rising to 52.3. This is better than expected, well into expansion territory and the highest level in a year.
  • Most of the gain came from the manufacturing side, where the index jumped to 49.6, almost out of contractionary territory. It was also pleasing that the biggest improvement came in Germany and German manufacturing in particular. 
  • Economic momentum has been improving since the start of the year, but the region was held back by weak core economies (Germany and France). An improving Germany will be a big boost to the region. 

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

How did fixed income markets perform last week?

  • Whilst US repricing has been more significant year to date, the last two weeks has seen an increase in European rate repricing driving the underperformance of European assets.
  • Year to date, the European fixed income market is trailed by the US, and this is even more evident when looking at US fixed income on a euro hedged basis.
  • However, we have seen this week that Europe cannot remain immune to what is happening in the US, as the latest FOMC minutes compounded to the reaction to last week’s PMI data, leading to a move in market expectations from expecting three cuts from the ECB to two cuts by the end of this year.
  • We have long said that whilst longer duration assets appear a lot more attractive today relative to recent history and are set to benefit from the start of the rate cutting cycle, patience is advised until this volatility surrounding rate cut repricing subsides. 

The week ahead: what to watch out for

Towards the end of this week, we will have Consumer Price Index (CPI) data from the euro area. The last CPI was strong, but will it be strong again? Recently, we had a weak US retail sales report, but will we see that reflected in the Personal Consumption Expenditure (PCE) reports to be released this week? We will also be receiving Purchasing Managers Index (PMI) reports from China and consumer sentiment reports from the US, which could make for interesting reading and give an indication of inflation progress.

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