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Markets and macro insights with Bernard Swords, Chief Investment Officer
It was a tough week for equity markets last week – what drove this?
- The world index was down nearly 2.0% last week. This weakness came from the IT sector amid rising tensions between the US and China. The focus is on high end semi-conductors and whether there should be limited or no supply of these to China.
- Understandably the IT sector was weak as a result, dropping over 5% last week and pulling the headline indices with it. Given the extent of the move in the IT sector this year, some element of resetting of prices is no bad thing. For earnings growth in the sector, it is the level of secular growth rather than any one region that is the main driver.
- The data from the US was a bit stronger than expected last week. Core retail sales growth was nearly 1% month-on-month – well ahead of consensus expectations of 0.2% – and there were upward revisions to previous months’ figures. So, we had a higher growth rate off a higher base.
- Industrial Production growth in the US was also stronger than expected, up 0.6% month-on-month, and reached its highest level since 2022. There are two conclusions you can take from this: firstly, whatever slowing there is in the US economy, it is not significant. Secondly, the sentiment surveys continually understate actual activity.
- Meanwhile, the Governing Council of the ECB held its regular policy meeting last week. It left interest rates unchanged and gave no signal about the timing of the next cut in interest rates.
- Our Chief Economist Dermot O’Leary summed up the implications of the meeting as follows: “The market is currently pricing in an 80% chance of a 25bps rate cut at the September meeting and was little changed on Thursday. That seems about right to us, but the key message from the ECB is that after the inflation spike of 2022/2023, disinflation remains in train and that tight policy can be eased somewhat. Contrary to market expectations at the start of 2024, the journey will be a slow one and not result in significantly loose policy.”
- The news was not so good in the euro area. Industrial Production statistics were released showing a decline of 0.6% month-on-month. The figures were depressed by bank holidays during the month, but even allowing for this, it is indicating an economy struggling to find some momentum.
- In China the Third Plenum (policy making session held every five years) concluded and underwhelmed. It was long on talk about reviving the economy and bringing stability to the property market but lacking in detail. There is no change in the outlook for the Pacific Rim economies as a result.
What happened in bond markets last week?
- Bond markets have been remarkably quiet and developed market yields continue to trade in the middle of the range that has formed over the last 18 months.
- We didn’t learn anything dramatically new from economic data releases over the week, that would change the story of cyclically falling inflation, rising unemployment and a path of least resistance towards more easing of central bank rates rather than less – and it is this story that is pulling yields lower from the short end.
- European yields have moved quietly lower on the week. They were down about five basis points since this time last week – and we see scope for this trend to continue.
- US yields in contrast were unchanged and it seems clear that they are apprehensively eyeing the ever-increasing likelihood of a Trump presidency – with all the uncertainty that entails for trade, migration, fiscal policy and potential military conflict.
- Over the weekend, we learned that Joe Biden will not be contesting the November presidential election. This was very much expected. There may be some uncertainty in markets until we see who the Democratic candidate is but the impact should be limited.
The week ahead: what to watch out for
The biggest data release this week will be the US GDP figures for the second quarter. This will give us a broader picture of consumption growth and we will get the updated PCE price data. In the euro area, sentiment surveys will be the key focus, including consumer confidence and the PMIs.
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