Ironclad at work
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
US markets were hit by inflation data that forced market participants to dial back on their expectations for Fed rate cuts as well as by fears of a flaring- up of conflict in the Middle East. Muted forecasts from banks at the end of the week also contributed to risk-off sentiment and a rise in equity volatility. Growing confidence that ECB rate cuts are coming in June ensured that the Stoxx Europe 600 fared better, returning -0.1% (in euros) last week against the S&P 500’s -1.5% (in USD), while Japan’s Topix rose 2.1% (in yen).
Diverging rate cut scenarios meant that government bond yields in the US rose while Bund yields fell, with stubborn inflation expectations behind the spike in shorter-term US yields. The yen fell to a 34-year low against the USD, with steep falls also for the Swiss franc and euro. Gold set another record high last week, seemingly impervious to higher US yields. Oil was down, but industrial metals marched ahead on hopes of a revival in Chinese manufacturing.
GEOPOLITICS
President Joe Biden promised “ironclad” US support for Israel and duly helped defend it against Iran’s missile and drone attack on April 13. The Iranian assault raises tensions in the wider Middle East and Israel’s reaction will now be crucial. The US is trying to de-escalate the situation.
KEY DATA
The US consumer price index (CPI) rose to an annual rate of 3.5% in March from 3.2% in March and 3.1% in January. The core CPI came in March was 3.8%, unchanged from February. The producer price index (PPI) was not so hot, but still rose at an annual 2.1% in March, up from 1.6% in February.
Whereas the US faces persistent inflation pressure, deflation is a worry in China, where the CPI rose just 0.1% year on year in March, down from 0.7% the previous month. Stripping out food and energy, annual core CPI declined to 0.6% from 1.2% in February. Annual PPI was -2.8% in March.
German industrial production picked up in February, rising 2.1% over January, when production also rose on a month-over-month basis. But February industrial production was still 4.9% lower than a year before and new manufacturing orders were 10.6% lower.
MARKETS VIEW
After US CPI accelerated, we now expect two 25 bps rate cuts this year – in July and December. This is a delayed start and a shallower path to the Federal Reserve’s easing path than we previously expected. The Fed is preparing to cut by half the rate at which it sheds Treasury securities from its balance sheets, Fed minutes show.
Rising Middle East tensions can be expected to increase market volatility. We are overweight gold. Industrial metals may also rise further on the back of US sanctions on Russian supplies of aluminium, nickel and copper.
In a further sign of geopolitics feeding de-globalisation, China reportedly told its largest telecoms carriers to phase out foreign chips that are key to their networks by 2027, while Taiwan Semiconductor Manufacturing Co. is set to receive USD6.6 bn in US government funding for factories in Arizona. On the corporate front, the bar has risen going into 1Q24 earnings, and we need confirmation of underlying trends.
