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    Weekly multi-asset update: May

    Weekly multi-asset update: May

    13 May 2022 Multi-asset
    Week to 13 May 2022

    Summary

    • US CPI beats expectations with inflationary pressures broad-based
    • Focus continues on how the Federal Reserve (Fed) and European Central Bank (ECB) react to inflationary pressures
    • China lockdowns intensify with ramifications for domestic growth and further aggravation for supply chains
    • Next week: central bank speakers and inflation-related economic data

    Weekly review

    US CPI beats expectations with inflationary pressures broad-based

    It remains a challenging time for many asset classes. Inflationary pressures were already building, but surging commodity prices, due in large part to Russia’s invasion of Ukraine and supply pressures resulting from COVID lockdowns in China, have exacerbated them. This has translated into even higher inflation. Indeed, the April US CPI print at 8.3% year-on-year was another inflation surprise to the upside. Looking into the underlying numbers, there were plenty of signs that the inflationary pressures remain broad and cannot simply be pinned on transitory shocks, such as those seen in energy prices as of late. That potentially makes it more difficult for the Fed to achieve the soft landing it was hoping for; or in other words, to manage to curb inflation whilst avoiding a recession.

    Focus continues on how Fed and ECB react to inflationary pressures

    A beat on the US CPI number, and evidence that inflationary pressures are broad-based, adds more pressure to the Fed’s task at hand. The market has moved to price in a further 7.6 interest rate hikes before the end of this year, which is in addition to the three that have already been carried out. For context on how far interest-rate expectations have moved, at the beginning of this year the market had just three hikes in total priced in. The ongoing debate is whether the central bank feels it necessary to deliver a triple hike (+75bp) in its June policy meeting. Guidance has suggested that this will not happen, but at this stage it is difficult to write it off. Ahead of the June meeting we will get the release of the May CPI print; however, this comes during the blackout period so there will be limited verbiage from any Fed speakers ahead of the policy decision.

    Across the pond there was significant news from the president of the European Central Bank (ECB), Christine Lagarde, who strongly signalled that the bank would start hiking interest rates in July. The first hike will follow the end of net asset purchases, with the timeframe between the two potentially as short as just a few weeks.

    China lockdowns intensify with ramifications for domestic growth and further aggravation for supply chains

    The story on economic growth has very much moved to one of moderation over the last few months and the central point of this is China, which serves as a good reminder that COVID is still a significant issue across parts of the world. Indeed, rather than seeing an easing of COVID restrictions in China, government policy is requiring wholesale lockdowns with implications both for domestic growth (which was already fragile) and further aggravating supply-chain concerns, which have obvious ramifications.

    Next week: central bank speakers and inflation-related economic data

    Next week the focus will be on retail sales data from the US, China and the UK, with the strength of the consumer being particularly important given the inflationary backdrop. Pressures from the housing market will also be in the spotlight with related data from both the US and China, the latter of which has been through a tough time of late. Outside of that, there is a long list of central bank speakers including names from both the Fed and the ECB that could give the market further guidance on upcoming policy decisions.

    Week to 6 May 2022

    Summary

    • Federal Reserve hiked rates as expected; Bank of England revised inflation and growth forecasts; equities whipsawed
    • US jobs report beats expectations as labour market remains hot; European sentiment takes another leg lower
    • Commodity companies have led positive beats in earnings, while financials and tech companies have disappointed
    • Next week: inflation data from US and China, Fed speakers, and European sentiment indicators

    Weekly review

    Federal Reserve hiked rates as expected; Bank of England revised inflation and growth forecasts; equities whipsawed

    There was a plethora of central bank activity this week, in which the main highlights were from the Federal Open Market Committee (FOMC) and the Bank of England (BoE). The FOMC’s actions on Wednesday were generally in line with the market’s consensus as they raised rates by +50bps and signalled that a balance sheet reduction would begin in June. The market-moving information came from Fed Chair Powell’s comments stating that no future +75bp hikes were currently being considered, effectively quashing the predictions that had begun to creep into market pricing. The 10-year Treasury bond yield climbed above 3% early in the week, for the first time since late 2018. The two-year/10-year yield curve spread has steepened to approximately 35bp. Meanwhile, the yield on 10-year Treasury Inflation-Protected Securities moved above zero, to around 0.2%, for the first time in just over two years.

    The BoE likewise met expectations with the magnitude of its hike (+25bps to 1%), however its revised growth and inflation forecasts was a concern for investors. The BoE now predicts inflation to peak at 10% in October, a 1% upward revision as a result of another expected increase of about 40% in the UK’s energy price cap. Additionally, the UK manufacturers’ purchasing managers index showed that nearly 85% of UK manufacturers faced increased purchasing costs in April, with none reporting decreases, reflecting the inflationary pressure in the economy. On the growth side, the BoE has forecast a -0.25% contraction of the UK economy in 2023 but has predicted the economy will narrowly miss a technical recession.

    Equity markets have struggled to find stability this week, and although the S&P 500 Index is down -0.51% for the week at the time of writing, it is a far cry from the +4.12% it reached on Wednesday. The announcement by Chairman Powell that +75bp hikes were not being considered initially calmed investors and rallied risk assets. However, this was reversed the following day on concerns over the Fed’s ability to manoeuvre a soft landing and the BoE’s forecast revisions. The Nasdaq, led by tech stocks, suffered the most and is now down over 22% YTD.

    US jobs report beats expectations as labour market remains hot; European sentiment takes another leg lower

    The main data release from the week was Friday’s US jobs report. The change in nonfarm payrolls in April came in at +428k, beating expectations of +380k and only marginally lower than March’s +431k figure. The unemployment rate however has remained unchanged at 3.6% while the labour force participation rate remained well below pre-pandemic markets. The current tightness of the labour market and high levels of inflation provides a backing to the Fed’s decision to raise rates earlier in the week. It also further supports our long dollar bias, which we have added to as real rates have moved higher.

    Sentiment in the eurozone has unsurprisingly shifted lower month-on-month, with the European Commission’s myriad of confidence indicators all missing expectations to the downside. Year-on-year retail sales were also lower, coming in at +0.8% versus +5% prior.

    Commodity companies have led positive beats in earnings, while financials and tech companies disappointed

    The earnings season is now in the tail end with the number of companies having reported in the US and Europe reaching 80% and 60% respectively. On the back of weaker activity and less flattering base effects, the average earnings growth in the US (+7% year-on-year) has declined comparative to previous quarters. This figure sits 4% above expectations but has been unable to galvanize markets in the face of the current macroeconomic headwinds. Similarly, in the EU, positive earnings per share (EPS) growth of +45% year-on-year has come in well above the +32% year-on-year growth expected. This has been driven by significant outperformance in commodity sectors, highlighted by the fact that EPS growth ex energy and materials is far lower at +13% year-on-year. Meanwhile, across both regions, financials and tech have underperformed.

    Next week: inflation data from US and China, Fed speakers, and European sentiment indicators

    Following on from the week’s central bank actions, the focus in the coming week will be on inflationary data from key economies as well as a number of Fed speakers. The US year-on-year CPI and PPI prints are both expected to decrease relative to March, leaving an upside surprise as a key risk for investors. Moreover, there will be plenty of key news from China with both inflation and trade data being released. Year-on-year exports are expected to drop from 14.7% to 2.7% following ongoing lockdowns, while the consensus for year-on-year PPI is +7.8%. We will also receive further insight into sentiment in Europe with ZEW survey results for the eurozone and Germany being released on Tuesday. The number of companies reporting will be slower in the US as the attention shifts towards Europe and Japan.

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