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Markets and macro insights with Bernard Swords, Chief Investment Officer
Looking at our sector strategy, we continue to focus on the structural growth themes. We are in the late stages of a cycle. As such, economic growth rates are not going to spike above trend, so it will not be a case of ‘a rising tide lifting all boats’.
What happened in equity markets last week?
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There was some consolidation in equity markets last week. In local currency terms, the world index was down 1.9% although a weak euro reduces the loss to 0.3%.
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The Asian Pacific region was the weak spot, dropping over 4%. An uninspiring policy announcement from the Chinese government at the start of the week was compounded by a belief that the Trump administration will get tough tariffs quite quickly. This fed through into sector performances with the Chinese sensitive materials sectors the weakest.
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Looking at the positives, the euro area was unchanged, and Financials and Energy were up on the week. There is hope that less regulation going forward will help sales and margins in the financial sector going forward.
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Going forward, equity markets are likely to be dominated by continuing speculation about US Government policy.
The ‘last mile’ for inflation in the US is still proving difficult. What did we learn from the latest inflation data?
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Last week the US CPI (Consumer Price Index) report showed core inflation running at 0.3% month-on-month, in line with expectations but flat over the last three months.
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The year-on-year rate remains well above 3% at 3.3%. More disappointing is that the three-month annualised rate jumped to 3.6%.
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There were high readings from some of the volatile components, so the inflation rate (airfares, used cars) is probably a little bit over-stated. Still, we would like to see a stronger disinflation trend come through soon.
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Meanwhile, the Producer Price Index (PPI) report did not give any cheer either. The core rate rose 0.3% month-on-month, slightly higher than forecast. The year-on-year rate increased to 3.1%, the fourth monthly increase in a row.
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As with the CPI report, the PPI release is not alarming, but it is indicating that the disinflation trend is deteriorating.
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Looking to the euro area, the industrial production report was weak. Industrial production (ex-Ireland) was down 1.2% month-on-month and basically unchanged over the last six months. One could argue it is stabilising but at a low level. Germany remains the main weak spot as the motor industry remains under pressure.
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Elsewhere, news from China was mixed but perhaps a little bit encouraging. Retail Sales showed a good rebound, up 4.8% year-on-year – that’s 1% better than forecast. There is a trade-in subsidy for consumer durables at the moment, so this growth is probably flattered somewhat. But it is still good to see some stronger performance from the Chinese consumer. China’s Industrial Production disappointed, up 5.3% year-on-year against forecasts of 5.6%. Like the rest of the world, the manufacturing sector is showing poor momentum.
The week ahead: what to watch out for
Much of the focus will be on euro area data releases this week. Inflation will be the main item where we will get an update on the disinflation journey. The main business sentiment surveys (the PMIs) will also be released. We will look to see if the improvement in the services sector is continuing.
