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Markets and macro insights with Bernard Swords, Chief Investment Officer
What were the key messages from our Asset Allocation Committee meeting last week?
- Our Asset Allocation Committee reviewed the data we have seen over the last month – and it was noted that the disinflation journey was mixed. It stalled in the euro area but resumed its journey in the US. We expect the downward journey to resume in the euro area.
- Growth indicators have softened right across the globe. However, it is the sentiment indices that are showing the major weakness. We expect some loss of momentum in the global economy in the second half of the year – but not a material amount. If there is significant weakness, central banks in the developed world can now give some support.
- Interest rate expectations have been reset and, in our view, they are as likely to be surprised as disappointed.
- The French election has now been digested by the markets, so we are comfortable about the euro area fixed income market at present.
- Equity markets made new highs despite weaker growth data. But the equity moves are very narrow and if we look at broader indicators, the equal-weighted indices have fallen modestly over the last quarter. So, we feel that there is not blind optimism in equity markets; they realise the short-term challenges.
- On a positive note, the earnings story gets better month by month. Usually, we see earnings forecasts being reduced as the year progresses but this year the opposite is happening. Consequently, we are comfortable about equity markets at current levels, but conscious that they could face a growth challenge in the short-term.
- As a result, we remain fully invested with a balance between equity and bonds. The initial turmoil following the French election showed the usefulness of having a mix of assets. Bond prices went up while equity prices went down.
The US released a pleasing inflation report last week. What was the key takeaway from the report?
For the second consecutive month, both core and headline inflation were lower than expected. The core rate is now at 3.3% year-on-year – its lowest level since April 2022. And so, after a poor start to the year, the disinflation trend is back on track in the US.The week ahead: what to watch out for
This week industrial production statistics will be released from the major regions. It is a sector that has been struggling; will we get any sign of improvement? We will also get an update on consumption trends in the US with the release of the retail sales data. The ECB Governing Council will meet, no changes are expected but we might see if the French election has any impact on council members’ thinking. Finally, second quarter results season will get underway this week.
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