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Markets and macro insights with Bernard Swords, Chief Investment Officer
What were the key data releases last week?
- Last week’s inflation news was mildly disappointing. The CPI report from the euro area showed core inflation stuck at 2.9% on a year-on-year basis. Both goods and services inflation were static on a year-on-year basis. As the ECB is on ‘data watching mode’, this release would incline it towards holding rates constant.
- This was backed up by some of the comments that were coming from the ECB’s conference in Sintra. Many governing council members kept talking about being ‘prudent’ and being ‘patient’ with respect to further interest rate cuts.
- ECB President Christine Lagarde said that the given the strong labour market, they had time to reflect on the incoming data. Meanwhile, ECB Chief Economist Philip Lane said it would take time to analyse the data and that there remained questions about the pathway of services inflation. All in all, comments seemed designed to push out expectations for interest rate cuts.
- In the US, the minutes of the last FOMC (interest rate setting body of the Federal Reserve) Meeting were released and they were leaning in the same direction as the ECB. They stated: “participants affirmed that additional favourable data were required to give them greater confidence that inflation was moving sustainably toward 2%.”
- Fed Chair Jerome Powell was speaking at the Sintra conference where he said inflation is getting back on a downward path. But he also said that with the strength in the labour market, the Federal Reserve can be patient about cutting interest rates.
- Meanwhile, it was not a good week for growth indicators. Both of the main sentiment surveys in US (ISM Manufacturing and non-Manufacturing) were weak. Both dipped below 50 indicating contraction in the economy. The Manufacturing survey has been ‘bobbing’ around the 50 level for over a year now, so that is not anything new. The non-Manufacturing took a big drop, down five points to 48.8. Last month it jumped 4.4 points, so we will have to wait for next month’s figure to get a real sense of the trend.
- Staying with the US, the non-Farm Payrolls number was better than expected with just over 200k jobs being created. However, there were large revisions downwards to the previous month’s figures. As a result, the three-month moving average has stepped down from 249k to 177k. It is slowing but not yet calamitous.
- Political events were prominent last week. The UK General Election produced the expected large Labour majority. As a result, the market reaction was muted. As against the rest of the world the UK will have political stability for the next four-to-five years. The next event will be the Autumn budget statement which should map out fiscal policy thinking over the next several years.
- The result of the second round of voting in the French election has been completed and the result was surprising. The extreme right RN will be coming in third and there was a better showing for the centrist parties. The result was a positive as the Eurosceptic support was lower than forecast. This should help the regions financial markets. For France, it means policy logjam at a time when it has to do something about the size of its deficit. Spreads are likely to remain higher than past levels.
How did equity markets perform last week?
- Equity markets continued their ascent last week, with world equities up nearly 1%. The IT sector led the way again, up nearly just over 2%, but cyclicals also had a good week. The probability of a Republican sweep in the US elections has given them a boost.
- We have a long way to go on the US election trail but at least we now have a sense how financial markets will interpret a Republican President and Congress and more fiscal loosening. It would be good for US equities and for cyclicals. However, it would be challenging for the long end of the US bond market.
The week ahead: what to watch out for
This week, we will have the inflation reports from the US (CPI and PPI). How far along the disinflationary journey have we gone? Elsewhere, Chinese trade data and the country’s inflation report will be released. Is it getting away from deflation?
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