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Markets and macro insights with Bernard Swords, Chief Investment Officer
What drove last week’s rally in equity markets?
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The equity market rally was led by a turnaround in the US bond market and a strong start to the reporting season. With bond yields declining, interest rate-sensitive sectors (utilities and property) were among the leading sectors. Strong results from US banks pushed financials to the top spot. The new economy sectors (IT and communication services) were the real laggards as they await results from some of the mega caps.
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A notable feature was the stronger performance from the euro area. In the last week, it is up over 3.5% versus the US, and up 2.5% in euro terms. This is despite the fact that it was better US data that got markets moving.
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Non-US markets will face the challenge of tariff announcements over the coming weeks, with further scope for the euro area to recover given the degree of last quarter’s under-performance.
A busy week for data releases – were they positive?
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The latest inflation report from the US was the highlight of the data releases. The Consumer Price Index (CPI) reported core CPI as slightly lower than forecast, 0.2%, versus consensus expectations of 0.3%. The year-on-year rate dropped slightly to 3.2%. Most of the downside surprise came from goods, with retail sales ex autos now declining year-on-year.
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The Producer Price Index (PPI) showed improvement, with core prices flat month-on-month. Inflation needs work but lower-than-expected core prices calmed a nervous US bond market.
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The retail sales report from December for the US was strong again. Core retail sales were up 0.7% against the consensus forecast of 0.4%. It looks like consumer spending will be up over 3% quarter-on-quarter, which should give a very solid out-turn for 2024 and a good opening momentum to 2025.
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News-flow outside the US was also better than expected. In the euro area, excluding the volatile construction and Irish data, industrial production figures were up 0.9% month-on-month, the strongest monthly reading in 2024. Some of this could be front-loading orders prior to any US tariffs that might be imposed.
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China’s Gross Domestic Product (GDP) statistics were much better than expected, up 5.4% as against a year ago, and higher than forecasts of 5.0%. The extra strength was broad based. It came from better consumption and industrial production with strong December figures.
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The Chinese property sector was down again this quarter, and deflation is still prevalent. Again, as in the euro area, we could be seeing the impact of front-loading demand from the US.
The week ahead: what to watch out for
The key releases will be the business surveys (the Purchasing Managers’ Index) and the euro area consumer confidence data. The ongoing results season will affect the equity market. The formation of the new US government will drive fluctuations in both the bond and equity markets, with all eyes on today’s inauguration of President Trump.
