The numbers for the week – 15 Apr 24

The numbers for the week – 15 Apr 24

Markets last week

Summary
  • It was a quiet and mixed week for equity markets, with volatility in rates continuing due to sticky US inflation data
  • US inflation for March exceeded forecasts, marking the third consecutive month of 0.4% readings for core inflation
  • US government bond yields rose following the inflation print, with the US 10-year yield closing the week at 4.52%. UK yields rose in sympathy with the US, with the UK 10-year gilt yield finishing the week at 4.14%
  • The narrative of ‘higher for longer’ has re-emerged as sticky inflation implies that the neutral rate of interest will be higher in the medium term
  • The European bond market had a better week as the European Central Bank (ECB) offered reassurance that cuts are coming. The ECB held rates steady last week, with the first cut likely at the next meeting in June
  • There are concerns that following rate cuts the increased interest rate differential between Europe and the US could lead to weakness in the euro. The euro lost 2% against the US dollar
  • Equity markets were mixed: the US and Europe fell slightly, whilst UK and Japanese equities finished in positive territory
  • Earnings season kicked off on Friday with a few big banks reporting mixed results
  • Conflict escalated in the Middle East. Geopolitical events are likely to remain in focus this week
  • The week ahead includes UK inflation and employment data.

 

Analysis

It was a quiet and mixed week for equity markets. Volatility in rates continued amid sticky US inflation data.

Inflation in the US for March was reported on Wednesday. Both headline and core consumer price index (CPI) data exceeded forecasts, marking the third consecutive month of 0.4% readings for core inflation. Housing and gasoline costs were significant contributors to the overall CPI increase, with shelter prices remaining stubbornly high despite expectations of easing. The super core services gauge, which excludes housing, saw a notable monthly gain, fuelled by factors such as car insurance and medical-care costs. This persistence of inflation challenges expectations of an interest rate cut in the US, which briefly sent ripples through markets on Wednesday, particularly the rates market.

US government bond yields jumped higher on Wednesday following the sticky inflation print. The upward pressure on rates has been a pattern throughout the course of the year but has accelerated in recent weeks. The US yield curve ‘bear steepened’, when longer dated bond prices fall (and yields rise) resulting in a steeper yield curve. The US 10-year yield rose 0.1% to close the week at 4.52%. The UK yield curve moved in sympathy with the US, but the move was not of the same magnitude. The UK 10-year yield rose 0.05%, finishing the week at 4.14%.

We are currently seeing a re-emergence of the ‘higher for longer’ narrative, as sticky inflation implies that the neutral rate of interest will be higher in the medium term and, crucially, higher than what the bond market currently implies. At the end of March, all six of the major western central banks had very similar interest rate expectations; however, so far this month the expectations for the US have become dislocated from the other regions.

It was a better week for the European bond market as the ECB, whilst deciding to hold rates steady, offered reassurance that cuts are coming. The US and European economies are in very different situations, with price pressures having eased considerably in the eurozone. This makes it more likely that the ECB will be able to ease policy before the US Federal Reserve (Fed). The first cut is likely to come at the next meeting in June, based on guidance from President Lagarde and the Governing Council. Yields across European countries fell, with the German 10-year bund yield falling 0.08% to close the week at 2.36%.

Although the fall in inflation and likely policy easing in the eurozone is undoubtedly good news, some concerns have emerged that following cuts the increased interest rate differential between Europe and the US could destabilise the euro. For every cut the ECB delivers, it will put pressure on the European currency. There was a notable 2.0% fall in the euro vs the US dollar last week as these concerns rose to the fore.

Equity markets were mixed: the US and Europe fell slightly, whilst UK and Japanese equities finished in positive territory. All eyes are turning back to the fundamentals as earnings season kicked off on Friday. A few big banks started the proceedings with mixed results. Many analysts judged that profits of the big banks would be elevated, given the fact that rates have risen this year. A few of the major banks reported that their net interest income, the earnings generated from lending, fell below analysts’ expectations, adding that increased funding costs had crimped profits. Financials led the decline in the US market, falling 3.4% vs. 1.5% fall in the broader market, in USD terms. A few more US banks are reporting this week, alongside some European Consumer Discretionary and Asian Technology companies.

On Friday, reports that Iran was planning an attack on Israel led to volatility in equity markets, a surge in oil and gold prices and a fall in government bond yields. Given the escalation in the conflict over the weekend, geopolitical events are likely to remain in focus during the week ahead.

The week ahead

Tuesday: UK employment data

Our thoughts: The UK is set to share new job figures this week. Wage growth is expected to be less positive for the period up to February, down to 5.8% from 6.1%. The Labor Force Survey will still have issues with low responses, but not as much as before. The unemployment rate is expected to rise slightly to 4%. Such a softening will be seen as a positive step towards slowing inflation.

Wednesday: UK inflation

Our thoughts: Inflation is expected to have fallen again in March with headline annual inflation anticipated to fall from 3.4% to 3.1%. Core inflation is also expected to fall from 4.5% to 4.1% and progress is expected in services inflation too. This will be good news for the Bank of England, giving them more confidence that inflation is heading towards the 2% target and pointing to rate cuts later this year.

The numbers for the week


Sources: FTSE, Canaccord Genuity Wealth Management

 

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