Markets Wrap (1H May)

Further eurozone rate cuts linger on

Few are doubting that June will see interest rate cuts as ECB is signaling an imminent lowering. Economists are convinced and the market is pricing in an almost 100% chance of a rate cut. Now with inflation standing at 2,4% the market is eyeing around 0,7% lower rates by year-end, which leads to three 0,25% cuts at every other ECB meeting. However, ECB has not given much guidance on further rate cuts. 

Labour market adjustments needed

Two of the most influential economists of this decade - former IMF chief Oliver Blanchard and former FED Chairman Ben Bernanke have just released a new paper on the recent uptick in inflation. They find that some countries (but likely not the US) will have to see weakening labour markets to quash inflation. So far there are few indicators that eurozone labour market is weakening - unemployment is still at an all-time low figure of 6,5% and employment figures are surging. It might be that for the same reason, the ECB has highlighted that wage growth must come down in order to have sustained inflation deceleration and lower rates. While so far primary indicators suggest lower wage growth, keep a keen eye on the negotiated wage growth print later this month. If wage growth does not come down substantially, we could kiss goodbye the three ECB rate cuts.

Markets finally stabilized in pricing FED rate cuts

It seems that every Markets Wrap this year has had a paragraph on the furthering interest rate cuts in the US. The first half of May has seen the first period of increasing prospects of interest rate cuts for this year. A lukewarm April inflation print of 3,4% was one of the culprits, as after 3 months of increasing inflation and constant consensus misses this was a long awaited relief. However, inflation on the other side of the Atlantic is still much higher than in other major European countries. The markets have come back to see two 0,25% rate cuts this year now, up from just above one at the end of April. Furthermore, US economic surprise index has fallen in to negative territory, indicating weakening economic conditions. 

Western stocks rally and Chinese companies bounce back

With the resurgence of US rate cut expectations stocks have taken this as a positive signal and both European and US stocks reached new record highs. Solid 1Q earnings have bolstered equity valuations and cyclical companies have benefited the most from the risk-on sentiment. Also, after underperforming US stocks in 2023, equity fund flows out of Europe have bottomed out and investor and fund manager surveys are pointing to a resurgence in European equities.

Chinese stocks have struggled ever since the start of 2021. However, it seems that the region's stocks have finally found its footing and have started to climb. The Chinese government is trying to shore confidence for property markets with a 300 bn yuan relending scheme, sales of long-term special bonds to raise cash to boost the economy and an overall revival in the tech sector, best reflected in the outperformance of the Hang Seng index.