Back to T+1 (after a century!)
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
May ended on a whimper for US equities, as the Fed continued to seed doubts about its rate cut intentions. Inflation numbers were as expected, but weak US Treasury auctions also dampened sentiment and impacted markets in Europe. Higher-than-expected May inflation also soured the mood in Europe despite the probability of an ECB rate cut this week. Yet risk markets were mostly up in May overall, with the S&P500 gaining almost 5% and the Stoxx Europe 600 3.5% (in local currency terms). There was some noticeable divergence in government bonds—US Treasuries rallied as US rate cut expectations receded, while German Bunds sold off, and the month ended with France’s sovereign ratings downgrade by S&P. Ten-year yields in the usually placid Japanese bond market rose stiffly as the market braced for possible Bank of Japan rate hikes to stabilise the yen, although dollar strength against the yen and other currencies wanned as May progressed. Oil drooped amid signs of oversupply, while gold prices rose modestly in May.
GEOPOLITICS
Ukraine has received approval from the US and Germany to use their weapons to hit targets inside Russia – another step up in the conflict.
KEY DATA
Personal consumer expenditures (PCE) inflation held steady at an annual rate of 2.7% in April (still well above the Fed’s target of 2%), while core PCE was at 2.8%. In other data, personal income grew a monthly rate of 0.3% in April, while personal spending rose 0.2%. US GDP growth in Q1 was revised down to an annualised 1.3% from previous estimates of 1.6%.
Headline consumer inflation in the euro area rose at an annual rate of 2.6% in May, up from 2.4% in April. Core inflation rose to 2.9% from 2.7%.
China’s official purchasing managers’ index for manufacturing fell to 49.5 in May from 50.4 in April, with a sharp fall in export orders. The alternative Caixin manufacturing PMI rose to 51.7 from 51.4. India’s GDP growth exceeded expectations, coming in at 7.8% year-on-year in Q4.
MARKET VIEW
Real Madrid won a record 15th Champions League title at the weekend, finding the kind of composure under pressure that European Central Bank policymakers must muster when they meet this week. We expect them to cut rates, but then move one step at a time. In the US, the spotlight will be on non-farm payrolls on Friday. We expect a first Fed cut in September.
In politics, the ANC’s historic loss of its majority raises uncertainty in South Africa, Mexico looks set for its first woman president, and Prime Minister Narendra Modi appears on course to win a third term in India, which we believe has strong long-term growth potential. Donald Trump’s conviction in New York is marginally positive for President Joe Biden.
Shares in a leading tech company slumped on disappointing sales of its AI servers. The news took some shine off AI companies. To decouple from the US, China is pumping another USD47.5 billion into its chip industry.
In the oil market, OPEC+ has agreed to extend deep production cuts into 2025, which should help support markets. Finally, for the first time in a century, US securities trades must now be settled in one business day – known as T+1 – rather than two.
