Investment Viewpoint: what were the key themes in markets last week?

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What were the key data releases last week and how did markets react?

• The US CPI report was one of the main releases and it made good reading for financial markets. Core CPI was up 0.16% month-on-month – the weakest since August 2021. The US PPI core rate was flat month-on-month (the weakest in over a year) and the year-on-year rate was stable at 3.2%. 
• Meanwhile, the Federal Reserve (Fed) dampened spirits somewhat. Interest rates were left unchanged, as was expected, at the monetary policy committee (FOMC) meeting. However, we got an update on the committee members’ interest rate expectations (the ‘dot plot’). In its last update in March, three interest rate cuts were expected by the end of the year. This has now fallen to one. We must remember that the Fed is on data watch and thus a couple of soft inflation reports would probably change the ‘dot plot’ again. 
• In the euro area we got update on the manufacturing economy. Industrial production dropped slightly (-0.1%) month-on-month. This is a better out-turn than the sentiment survey (the PMI) would suggest. The euro area economy is improving but the momentum is low.
• Global equities rose last week but there were major differences by region and by sector. The US is outperforming again, up 1.3%, while the euro area fell over 4%. Sectoral dispersions are also extreme: IT was up almost 6%, the next best Communication Services was up less than 2% and five of the 11 sectors were down.
• The US strength is being driven by the high exposure to the IT sector and the better CPI report. In the IT sector, there were strong results from Broadcom in the semiconductor industry and some catchup from Apple. The euro area is haunted by political risk again and question marks are being raised about the degree of unity in the region going forward. We are unlikely to see these trends reverse in the short-term. That is why we increased our exposure to IT recently and maintain a strong preference for the US over the rest of the world.

What were the key themes in fixed income markets last week? 

• It was another big week for fixed income markets with a sharp fall in interest rates across the maturity curve albeit with a widening of the credit spreads paid by corporate and peripheral European government borrowers. 
• As mentioned above, we saw benign inflation data from the US alongside central bank commentary that did not seem to fully embrace this good news. 
• Meanwhile, political developments continued to cast a very long shadow.
• The fallout from the performance of the right-wing parties in Europe and the impending elections in France are causing great discomfort in bond markets.
• French bonds underperformed substantially last week. That said, across the maturity curve, their prices have gone up and their yields have fallen over this time period – just not by nearly as much as have those of the equivalent German bonds. 
• It’s also important to note that this move to the right is happening in the context of growing geopolitical tensions between China, Russia and NATO and amidst a real possibility of escalation in the conflict in the Middle East. 
• These dynamics raise the risks of renewed supply-side disruptions – which were undoubtedly a key factor in the 2022 inflation surge.
• So, while political risks may not come to pass, they do push back against the benign inflationary story that we have seen so far this year.

The week ahead: what to watch out for

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