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Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
The UK
Business activity in the UK grew at the fastest pace in almost a year, with the composite PMI rising to 54.0 from 52.8 in March. Input costs increased at the strongest pace in 11 months, but output prices declined, suggesting that weakening demand is squeezing business margins.
The US
The week started off on a strong note, seemed to be due to investors trying to capitalise on recent declines in the tech sector as well as short covering or buying to limit potential losses on bets that stocks will decline. The buying continued on Tuesday, potentially due in part to some downside surprises in economic data – interpreted as good news for markets because of the reduced pressure it implied on inflation and interest rates. S&P Global reported that its purchasing managers’ index (PMI) of US manufacturing activity fell back into contraction territory (below 50.0) in April at 49.9, well below consensus estimates of around 52.0. S&P’s PMI of services activity, while still indicating expansion, also missed expectations at 50.9 versus 52.0.
Thursday’s bad economic news appeared to be treated as bad news, however. The Commerce Department’s advance estimate showed the economy expanding at an annualised rate of 1.6% in the first quarter, well below consensus estimates of around 2.5% and the slowest pace of growth in nearly two years. A sharp slowdown in government spending and a widening trade deficit were partly to blame, but consumers also continued to rein in spending, particularly on goods. Separate data released Wednesday showed that businesses continued to increase capital spending in March, but at a slower pace (0.3%) than in February, where the gain was revised lower to 0.4%.
Inflation data released Thursday also seemed to concern investors, raising worries that the US might even be in danger of “stagflation” or rising prices alongside flagging growth. The Commerce Department reported that its core (less food and energy) personal consumption expenditures (PCE) index rose at an annualised rate of 3.7% in the first quarter, more than expected and well above both the fourth quarter’s 1.7% increase and the 2% long-term inflation target of the Federal Reserve (Fed).
Friday’s rebound in stocks appeared largely due to better news on the inflation front, with futures jumping after the Commerce Department’s release of monthly core PCE data. Core PCE inflation continued to decline on an annual basis in March, if ever so slightly, falling to 2.82% from 2.84% in February, and continuing a downward trajectory that began in October 2022. Friday also brought news, however, that the University of Michigan’s revised gauge of consumer sentiment in April fell back from a nearly three-year high in March, reflecting, in part, higher inflation expectations.
Europe
Numerous European Central Bank (ECB) policymakers have signalled that they expect to lower interest rates in June, barring economic shocks. However, comments by hawks appeared to cast doubt on subsequent reductions in borrowing costs. German Bundesbank President Joachim Nagel said in a speech that a decision in June “would not necessarily be followed by a series of rate cuts," given the current uncertainty. Executive Board member Isabel Schnabel highlighted that services inflation was the biggest concern. "There is a consensus emerging that we may be facing a quite bumpy last mile," she said.
Business activity in the eurozone grew at the fastest pace in nearly a year in April, driven by a recovery in the services industry, according to purchasing managers’ surveys compiled by S&P Global. A first estimate of the HCOB Eurozone Composite PMI, which includes the services and manufacturing sectors, came in at 51.4, up from 50.3 in March. A consensus forecast had called for PMI of 50.7. Readings above 50 indicate expansion.
Germany’s PMI and the Ifo Institute’s barometer of business confidence provided further evidence that the country’s economic downturn may be bottoming out. The private sector returned to growth in April, as services activity increased and a decline in manufacturing eased. Overall business sentiment improved for a third consecutive month, and the government increased its forecast for economic growth this year to 0.3% from 0.2%.
Japan
The Bank of Japan (BoJ) refrained from making changes to its monetary policy at its April meeting, perceived as broadly dovish by investors. BoJ Governor Kazuo Ueda hinted that confidence to raise interest rates further is set to increase in the second half of this year, however.
Once again, authorities refrained from intervening in the currency markets to prop up the historically weak yen, despite intense speculation about the growing likelihood of such action. The yen weakened to JPY 158.3 against the USD, from 154.6 at the end of the previous week. Within this context, Ueda acknowledged that prolonged currency weakness is a risk factor. He reiterated that the central bank would keep monitoring foreign exchange markets and their impact on the economy.
Inflationary pressures showed some signs of easing, with the Tokyo-area core consumer price index (CPI) rising 1.6% year on year in April, short of consensus expectations and down from 2.4% in March. The easing was attributable primarily to the impact of subsidies.
Elsewhere on the economic data front, flash April PMI releases signalled stabilisation in Japan’s manufacturing sector while the services segment strengthened. The composite PMI rose to 52.6 from 51.7 in March. The pace of hiring picked up across the private sector, as business confidence remained positive, suggesting that the expansion in activity is likely to be sustained in the near term, according to au Jibun Bank, which compiles the PMI survey.
China
China’s economy is expected to grow 4.8% this year, up from a median forecast of 4.6% last month, according to 15 economists surveyed by Bloomberg. China’s GDP grew an above-consensus 5.3% in the first quarter from a year earlier, accelerating slightly from the 5.2% year-over-year expansion in the fourth quarter of 2023. However, economists downgraded their inflation forecasts as declining producer prices and a persistent property market slump remain a drag on the economy.
On the monetary policy front, Chinese banks left their one- and five-year loan prime rates unchanged at 3.45% and 3.95%, respectively, as expected, after the People’s Bank of China kept its medium-term lending rate on hold the prior week. Some analysts believe that policymakers have turned more cautious on monetary easing after the central bank withdrew cash from the banking system for a second consecutive month in April.
Australia
The first-quarter CPI picked up to 0.9% quarter-over-quarter (QoQ) from 0.7% in the fourth quarter of 2023. More importantly, the preferred measure of underlying inflation of the Reserve Bank of Australia (RBA), the trimmed mean, reaccelerated to 1.0% QoQ from 0.8% in the previous quarter, above RBA’s forecast in February and market consensus. This data, along with recent strong labour market reading, is likely to raise the RBA’s concerns about the stickiness of inflation, further delaying the pace of rate cuts.
Markets
Last week, the MSCI All Country World Index (MSCI ACWI) rose 2.6% (5.6% YTD).
In the US, the S&P 500 Index moved 2.7% higher (7.4% YTD), managing to snap a string of three weekly losses as investors responded to the busiest week of the first-quarter earnings reporting season. As of the end of the week, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have increased 3.7% in the first quarter relative to the year before, with “both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises... above their 10-year averages.”
The technology-heavy Nasdaq Composite Index performed best, soaring 4.2% (6.3% YTD), helped in part by strength in Apple and a late rebound in chipmaker NVIDIA. Shares in Google parent Alphabet also surged late in the week following its announcement of better-than-expected first-quarter earnings along with the company’s first dividend payment. Conversely, Facebook parent Meta Platforms fell sharply – at one point erasing nearly USD 200 billion in market value – after CEO Mark Zuckerberg announced plans to continue heavy spending on artificial intelligence and other new technologies.
Growth stocks outperformed value shares and small-caps finished modestly ahead of large-caps. The Russell 1000 Growth Index returned 3.7% (8.4% YTD), the Russell 1000 Value Index 1.4% (5.3% YTD) and the Russell 2000 Index 2.8% (-0.8% YTD).
In Europe, the MSCI Europe ex UK added 1.7% (7.0% YTD), snapping a three-week losing streak. An easing of Middle East tensions and some encouraging corporate earnings results helped to boost sentiment. Major stock indexes advanced. Germany’s DAX Index increased 2.4% (8.4% YTD), France’s CAC 40 Index put on 0.8% (8.1% YTD) and Italy’s FTSE MIB Index climbed 2.5% (15.2% YTD). Switzerland’s SMI Index gained 1.0% (4.4% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.07 for EUR.
In the UK, the FTSE 100 Index rallied 3.1% (6.8% YTD) to fresh all-time highs and the FTSE 250 Index added 2.3% (1.8% YTD). The British pound strengthened versus the US dollar, ending the week at USD 1.25 for GBP, up from 1.24.
Buoyed by historic yen weakness, Japan’s stock markets gained over the week. The TOPIX Index climbed 2.3% (14.6% YTD) and the TOPIX Small Index jumped 2.1% (9.3% YTD).
In Australia, the S&P ASX 200 Index was broadly flat, adding 0.1% (1.5% YTD). While the ASX 200 pushed higher at the beginning of the week as BoJ Governor Ueda repeated that financial conditions will remain accommodative, the index gave back most of the gain towards the end of the week as BHP moved notably lower after it sent an unsolicited, non-binding and highly conditional combination proposal to acquire Anglo American. Australian government bond yields rose with the curve modestly flattening. The Australian dollar appreciated against the US dollar by 1.9% as a result.
MSCI Emerging Markets Index closed 3.8% higher (2.4% YTD), with a positive contribution to performance from the stock market of China, India, Taiwan, South Korea and Brazil.
Chinese stocks rose as investors grew more optimistic about the economy. The Shanghai Composite Index was up 0.8% (3.9% YTD) and the blue-chip CSI 300 Index added 1.2% (4.5% YTD). In Hong Kong, the benchmark Hang Seng Index soared 8.8% (4.1% YTD).
In Hungary, the National Bank of Hungary (NBH) held its regularly scheduled meeting on Tuesday and reduced its main policy rate, the base rate, from 8.25% to 7.75%. The NBH also reduced the overnight collateralised lending rate – the upper limit of an interest rate “corridor” for the base rate – from 9.25% to 8.75%. In addition, the central bank lowered the overnight deposit rate, which is the lower limit of that corridor, from 7.25% to 6.75%. These 50-basis-point (bp) rate cuts, which were smaller than the central bank’s 75bp rate reductions at the end of March, were widely expected.
According to the central bank’s post-meeting statement, policymakers continued to characterise disinflation as being “strong and general in the Hungarian economy.” They also noted that the annual rate of consumer price inflation in March was 3.6% and that inflation has been within the central bank’s “tolerance band” since the beginning of 2024. However, they continue to expect that the “pace of price increases will rise temporarily in the middle of this year due to the backward-looking pricing of market services and base effects.”
Nevertheless, policymakers concluded that “the outlook for inflation warrants further reduction in the base rate at a slower pace than earlier.” They specifically identified a “new phase” of monetary policy that began in April and noted that risks related to “global disinflation, volatility in international investor sentiment and the sustainable continuation of domestic disinflation warrant a careful and patient approach to monetary policy in the coming months.”
In Türkiye, the central bank held its scheduled monetary policy meeting on Thursday. As was widely expected, it left its key interest rate, the one-week repo auction rate, at 50.0%.
According to the post-meeting statement, policymakers noted that “the underlying trend of monthly inflation was higher than expected” in March and that their one-week repo auction rate hike from 45.0% to 50.0% toward the end of March has led to “a significant tightening in financial conditions.” They also acknowledged that the “lagged effects” of monetary policy tightening was the reason for keeping rates unchanged, but they cautioned that future interest rate increases are possible “in case a significant and persistent deterioration in inflation is foreseen.”
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.2% (-1.6% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.4% (1.8% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index was flat (-0.5% YTD).
The yield on the benchmark 10-year US Treasury note decreased somewhat following the release of Friday’s PCE data but still ended the week near its highest level in almost six months. Over the week, the 10-year Treasury yield increased 5bp to 4.67% from 4.62% (up 79bp YTD). The 2-year Treasury yield increased 1bp to 5.00% from 4.99% (up 75bp YTD). The investment-grade corporate bond market had a relatively quiet week with limited issues that were largely oversubscribed.
European government bond yields hit their highest levels this year. Strong US economic data increased expectations that the Fed would keep interest rates higher for longer, which could force other major central banks to follow suit. Over the week, the 10-year German bund yield rose 7bp, ending the week at 2.57% from 2.50% (up 55bp YTD) after briefly spiking above 2.6%.
In the UK, the 10-year gilt yield rose 9bp, ending the week at 4.32% from 4.23% (up 79bp YTD).
In Japan, the yield on the 10-year Japanese government bond rose to 0.89% from the prior week’s 0.85%.
Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM
Michael Walsh, FIA, CFA
Solutions Strategist
Eva Wu,
Solutions Analyst
202404 - 3543868
Notes
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