Que sera, sera
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Last week, the US equity market was overshadowed by speculation about the size of the upcoming Fed rate cut. While the consumer inflation report for August seemed to cement the case for a 25 bps rate cut this week, forecasts of a 50 bps cut also gathered steam. A noticeable rebound in big, defensive companies contributed to the S&P 500’s strong 4.1%i return over the week (in USD), while thoughts of outsized rate cuts pushed the Russell 2000ii 4.4% (in USD) higher despite a survey showing a big drop in small-business optimism in the US. While the ECB’s rate cut had already been well priced in, the Stoxx Euro 600iii rose 1.9% (in euros) in a relatively data-free week.US Treasuries were pretty volatile as marketparticipants wavered in their predictions of the pace and size of Fed rate cuts. But shorter-term Treasury yields dropped strongly at the end of the week as talk of a 50 bps Fed rate cut gathered pace and consumers’ annual inflation expectations dropped (largely thanks to the fall in oil prices). Speculation over a 50 bps rate cut drove gold prices to a fresh high in USD terms.
QUOTE OF THE WEEK
“The situation at the moment is really worrisome,” said former Italian prime minister Mario Draghi, calling for a new industrial strategy in Europe with an 800 bn euros annual investment boost. “It’s: ‘Do this, or it’s a slow agony’.”
KEY DATA
The US consumer price index (CPI) rose at an annual rate of 2.5% in August, down from 2.9% in July, while core CPI held steady at 3.2%. The producer price index (PPI) slowed markedly to a yearly rate of 1.7% from 2.1%. The University of Michigan’s September consumer sentiment rose in September to 69, the highest level since May.
China’s CPI increased 0.6% year-on-year in August, up from 0.5% in July. Chinese exports surged by 8.7% in August from a year before, the fifth consecutive month of growth, while imports rose by just 0.5%. Industrial production in China rose at an annual 4.5% in August, down from 5.1% in July, while retail sales rose 2.1%, down from 2.7%.
Japan’s GDP growth in Q2 was revised down to an annualised 2.9% from the initial estimate of 3.1%.
MARKET VIEW
The Fed takes centre stage this week, with markets pricing an almost equal chance of a 25 bps or 50 bps cut so either way it will be a surprise to markets. Retail sales data on Tuesday may make the difference. We expect the policymaking FOMC to start with a 25 bps cut and for its median projections to show 75bps of cuts this year, and then 125bps in 2025.
In geopolitics, risks are elevated as shown by Russian President Vladimir Putin saying the West would be fighting directly with Russia if it allowed Ukraine to use its long-range missiles. Washington accusing China of directly supporting Russia in Ukraine adds to tensions. We are long gold.
In markets, Italy’s sale of 8 bn euros of new 30-year debt attracted demand of 130 bn euros, making it more than 16 times oversubscribed. We favour moving from cash to fixed income. A flurry of deals in the gold mining sector and one European bank’s purchase of a stake of almost 10% in another underline our M&A theme.
