Investment Viewpoint: all on the line for Bayrou
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Markets and macro insights with Bernard Swords, Chief Investment Officer
What was the most important news for investors last week?
Equity markets continued to edge higher, with global equities rising by around 0.5% in local currency terms. Much of the movement was driven by news concerning the fortunes of individual companies. Businesses in the Communication Services sector experienced welcome developments, such as in the case of the US court ruling in favour of Alphabet, Google’s parent company. Alphabet will not be required to break its monopoly by selling off its operating system Android or its search engine Chrome. Consumer Discretionary spending also showed healthy increases, largely thanks to Amazon’s announcement of its new AI strategy, which was well received by investors. The broader market tone was shaped by optimism on the issue of interest rates, and this received a further boost from the weak jobs report. Investors are increasingly hopeful that the US Federal Reserve may begin cutting rates.
What were the other noteworthy trends?
In contrast to the positive news on company performance and rates, other economic data from the US was mixed. The jobs report was weak with just 22,000 jobs added, according to non-Farm Payrolls data. Previous releases were also reissued with a revised, net downward trend. However, both major business surveys – the ISM Manufacturing and ISM non-Manufacturing – showed improvement. The Services index rose to 52, indicating expansion, while Manufacturing remained just below the 50 mark at 48.7. Importantly, the strength in both surveys came from new orders, suggesting that business activity is picking up, at least in the near term.
What is the situation in the euro area?
In the euro area, the overall picture was more mixed. Inflation remains obdurate, with core CPI holding steady at 2.3% year-on-year for the fourth consecutive month. This suggests that the disinflation trend may be stalling. On the growth side, retail sales were weak, falling 0.5% month-on-month. Furthermore, annual growth has slowed to 2.2% in nominal terms. These conflicting signals – stubborn inflation versus slowing growth – leave the European Central Bank facing tough decisions.
What were the important developments for the global economy?
Last week, developments on trade policy moved to the forefront again. The US and Japan appear to have reached a new agreement on tariffs, a deal broadly in line with previous discussions. However, uncertainty remains in the tech sector, since President Trump has again hinted at the possibility of higher tariffs on semi-conductors.
Political news added a layer of complexity to economic uncertainties. Stephen Mirren, nominated to the Federal Reserve by President Trump, stated during his Congressional hearing that he would be continuing in his current role as Chair of the White House Council of Economic Advisers unless his job at the Fed becomes permanent. This raises questions about his independence in the short term. Meanwhile, in Europe, President Macron is working to avoid a significant jolt of confidence to the French economy. French Prime Minister Bayrou is likely to lose a confidence vote on Monday; Macron will seek to appoint a new government to push forward with a planned budget, preventing the destabilisation that would result from a snap election.
The week ahead: what to watch out for
Next week we get inflation data from the US that will provide indications of whether high tariff rates are having an impact. From China, we will receive inflation and trade data. In Europe, the only event of note will be Monday’s vote in France and the negotiations on government-formation to follow.
