The last few weeks have been full of macroeconomic news financial and geopolitical issues which have caused a new rise in bond yields, with the Treasury curve moving closer to 5%. The latest three US inflation data have weakened beliefs of investors and perhaps even central bankers.
Inflation, where are we at?
He writes it Fabrizio Santin, Senior Investment Manager of Pictet Asset Management in a long analysis in which he explains that the process disinflationary “it is proceeding slowly compared to the second half of 2023: since January the findings relating to the services component, the most important one because it represents a preponderant slice of household consumption, have been too strong to be neglected. The expectations of the financial markets have followed this evolution and, if in January they expected almost two percentage points of rate cuts on the money market by the end of the year, now they barely expect a cut of 0.25% between September and December”.
What impacts on global markets
The problem for financial markets is that, once the cuts – the expert further underlines – “the markets have begun to incorporate, for the moment with a very limited probability, new increases in interest rates, the consequences of which would be negative for the main asset class. The Federal Reserve meeting in early May reassured the market. Powell reiterated that financial conditions are already tight and indicated that he could cut interest rates to 3% inflation if he sees a slowdown in the labor market. In Europe, the situation is simpler: weak growth, low consumption and inflation at levels just above 2% will require a cut that will almost certainly arrive in June. On the growth front, the data remain solid, as recorded by US household consumption, although the latest data relating to the labor market indicate a partial slowdown in the creation of new jobs; this is a trend that will continue carefully monitored.”
The season of US corporate quarterly reports
The season of American corporate quarterly publications is drawing to a close, with only one of the Magnificent Seven missing. The evolution “was good with a significantly favorable bit level compared to analysts' estimates. This has happened in almost 80% of cases and S&P index-level earnings are in growth of 5% recompared to the previous quarter. In general, the shares most present in investors' portfolios were penalized in the event of results in line with expectations, indicating a positioning partially corrected by the small April revision of 5 percentage points of the share prices. A strongly accelerating cycle of capital investments in the technology sector is confirmed. Demand for AI servers translates to Cloud growth rates above 30% year-over-year for the industry leader. The demand for smartphones signals a significant improvement on the Android range, while for the iPhone we will have to wait for the innovations on the product range expected for the summer, especially with regards to the software component”.
Overall – concludes Santin – the context “remains favorable to risk assets. There solid nominal GDP growth above six percentage points should allow positive surprises not yet fully incorporated, especially for the'S&P 493, that is, to the exclusion of the Magnificent Seven. The tentative signs of recovery we are seeing in Europe, and in some parts of the Chinese economy, could provide some interesting tactical opportunities. We are keeping our focus on inflation which could change the moves of central bankers if the current rise were to worsen.”
Investment opportunities
As for the bonds, the real yields – therefore adjusted for the inflation effect well above 2% – are very high interesting in the United States (rarely observed in the last twenty years). However, the current favorable evolution of the economic cycle and the lack of fiscal discipline on the part of governments in developed countries require greater attention and tactical use of portfolio duration.
Despite the difficulties relating to a investment framework complicated by correlations that do not behave normally, with bonds and shares losing at the same time, “we believe that the financial markets present investment opportunities with expected returns for strategies multi-asset psignificantly higher than those that can currently be obtained with a nominal or value BTP”, concludes Santin.
