Markets last week
Summary
- A positive week for asset prices with global bonds and equities making moderate progress
- US equity market reached a new all-time high, supported by strong performance from the technology sector
- Government bond yields have been rangebound, fluctuating due to mixed signals from economic data
- European Central Bank (ECB) cut its main deposit rate by 0.25% to 3.75% - first time in almost five years
- ECB simultaneously raised their inflation and growth forecasts
- The move was described as a “hawkish cut” and the ten-year German bund yield rose from below 2.5% before the meeting, to close the week at 2.62%, still lower over the full week
- Economic data in the US continues to provide mixed signals
- US Treasury yields fell early in the week due to a slowdown in the manufacturing sector but reversed mid-week due to stronger data in the second half of the week
- Nonfarm payrolls jumped to 272,000, much higher than the 180,000 consensus expectation, leading to a surge in US treasury yields
- Emerging market equities performed well, particularly in Asia
- Indian equities performed well despite a weaker-than-expected election result for Prime Minister Narendra Modi
- Mexico’s election led to a sharp fall in Mexican assets due to concerns about potential policy changes and their impact on the economy and investment climate.
The week ahead
- The Federal Reserve (Fed) interest rate decision is due on Wednesday
- The June Fed meeting is regarded by some as the most pivotal of 2024 but is unlikely to provide any major surprises
- The Federal Open Market Committee (FOMC) may nudge its inflation projections higher and trim its real GDP growth estimates. The futures market puts the probability of an interest rate cut at 1.3%, with only an 8% probability of a cut in the July meeting
- UK employment data is due on Tuesday, with little progress expected on wage growth.
Analysis
Market environment
It was a positive week for asset prices as global bonds and equities made moderate progress. The global equity market delivered 1.2% whilst global bonds returned 0.4%.
The US equity market reached a new all-time high supported by strong performance from the technology sector. It was the AI ‘winners’ that performed best with the world’s most valuable semiconductor firm topping a market capitalisation of US$3 trillion. Whilst the US equity market reached new peaks, smaller cap stocks retreated.
Government bond yields have been rangebound over the last few months, fluctuating due to the mixed signals from the economic data. This continued last week as yields fell early on before surging in the second half of the week. US Treasury yields are currently trading towards the lower end of their recent range, while European yields are at the higher end. Interestingly, this is the case despite the ECB cutting interest rates on Thursday.
In recent weeks, inflation data has set the tone alongside the earnings announcements of a few big tech companies. With the ECB meeting last week, the Fed this week and the Bank of England (BoE) the week after, central banks are taking centre stage in June.
ECB
The ECB cut their main deposit rate by 0.25% to 3.75% as was widely anticipated through clear guidance from the ECB’s Governing Council. This marked the first time the ECB has cut rates in almost five years, and unusually the ECB has moved ahead of the Fed.
The devil was in the details as the ECB simultaneously raised their inflation and growth forecasts. The policy statement was at the hawkish end of the spectrum pointing to continued domestic price pressures and elevated wage growth, suggesting that inflation was likely to remain above the 2% target well into 2025. The statement also outlined that policy would remain sufficiently restrictive for as long as necessary to achieve the inflation target. It’s difficult to infer the rate trajectory for the rest of this year, but the ECB seems to be leaning more towards caution. Many market participants were hoping for clearer guidance towards another cut later this year.
Altogether, the move was described as a “hawkish cut” and the ten-year German bund yield subsequently rose from below 2.5% on Wednesday to close the week at 2.62%. Nonetheless German bund yields were marginally lower over the week as they fell in sympathy with US Treasury yields in the first couple of days.
US economy and market implications
Economic data in the US continues to provide mixed signals which led to some toing and froing in bond markets. US Treasury yields fell early in the week as the ISM manufacturing index data showed a slowdown in the manufacturing sector. The data in the second half of the week was notably stronger including the ISM services data which reported that the services sector expanded by the most in nine months. This led to a reversal in yields midweek.
The labour market has substantial implications for the disinflationary path in the US and the data has delivered some surprises in the last couple of months. This was the case once again last week. May’s report released on Friday saw robust job gains. Non-farm payrolls jumped to 272,000, much higher than the 180,000 consensus expectation.
US treasury yields shifted higher on Friday with the ten-year yield jumping from 4.27% to close the week at 4.43%. In the spirit of mixed signals, despite the upside surprise in payrolls, unemployment unexpectedly increased to 4%. Over the full week US Treasury yields ended slightly lower having fallen in the first couple of days.
Emerging markets
Emerging market equities performed well, particularly in Asia. South Korean and Taiwanese equities delivered strong returns: both economies have a presence in the technology industry and their equity markets reflect the strong performance of the sector last week.
Indian equities performed well, shrugging off the weaker-than-expected election result for Prime Minister Narendra Modi. The Indian stock market has benefitted from the relative weakness in China, as well as strong economic fundamentals. India’s economy grew 8% in the fiscal year to the end of March, beating estimates. India is supported by a rising middle-class and strong demographics. The strong growth prospects of the Indian economy are reflected in the country’s stock market valuation; on a price/earnings basis the Indian equity market is one of the most expensive globally.
Mexico’s election delivered some equally surprising results leading to a sharp fall in Mexican assets. Claudia Sheinbaum, the former Mexico City mayor, won the presidential election and is set to become Mexico’s first female president. Her party, Morena, and its allies gained an unexpected landslide victory resulting in a significant majority in both houses of Congress. The Mexican peso suffered its worst week in four years, depreciating 8% against USD. In GBP terms, the country’s stock market fell over 11% last week, in large part driven by the foreign exchange (FX) weakness. The reaction reflects concerns about potential policy changes and their impact on the economy and investment climate.
The week ahead
Tuesday: UK employment
Our thoughts: The UK is set to publish its latest employment figures on Tuesday. Regular wage growth, excluding bonuses, is expected to have increased to 6.1% during the three months to April, up from 6% in March. Despite this, the overall trend is declining and wage growth should decelerate as headline inflation nears 2% (inflation in the UK is 2.3% year-on-year). It should be noted that the employment data continues to be impacted by a low response rate.
Wednesday: Fed interest rate decision
Our thoughts: The June meeting is regarded by some as the most pivotal of 2024, but is unlikely to provide any major surprises.
The June meeting has been noted as the best opportunity for the central bank to enact policy changes without the fear of being accused of having political motivations in the run-up to the November election. Many had forecast June as the most likely meeting for the Fed to cut. This seems very unlikely now, however, given the persistence of inflation.
Secondly, the FOMC are due to release their latest summary of economic predictions data, which includes forecasts for economic growth, inflation, the labour market and most importantly, interest rates. The updated ‘dot plot’ provides a visual representation of officials’ expectations for the Fed funds rate over the next few years and in the longer run. This will be key in determining the rate trajectory and substantiate changes in officials’ views in the last quarter.
The language used by the FOMC has changed since the end of 2023 as inflation has proved persistent. Initially, the FOMC signalled that at least three rate cuts could be on the cards for 2024. However, the tone of the last meeting’s minutes took a bit of a hawkish turn, which has continued since the May meeting. This change in language has led to increased anticipation for the June meeting, particularly as the economic data has provided mixed signals.
Despite this, major surprises seem unlikely. The FOMC may nudge their inflation projections higher and trim their real GDP growth estimates. The futures market puts the probability of an interest rate cut at 1.3%, with only an 8% probability of a cut in the July meeting. This leaves three meetings for the Fed to cut rates in 2024 with the September and November meetings occurring at important moments in the election cycle.
The numbers for the week
Sources: FTSE, Canaccord Genuity Wealth Management