The digest
Global equities entered bull market territory last week. The MSCI World Index is now up 25% from its October 2022 lows, closing last week up 2.7%, while regionally, the S&P 500 Index was up 2.6%, the STOXX Europe 600 Index was up 1.5%, whilst the MSCI Asia Pacific Index closed up 2.7%.1 The focus for last week was on central bank announcements, with the Federal Reserve (Fed) holding interest rates steady while the European Central Bank (ECB) raised rates by 25 basis points (bps), both as expected. The details of the statements from both central banks were largely seen as hawkish, but the markets appeared to look beyond that.
Chinese stimulus hopes also helped to buoy global investor sentiment last week, with rhetoric suggesting further measures will be taken to boost China’s economy.
Global indicators point to a bullishness amongst investors. The CNN Fear and Greed Index is at 83, firmly in “Extreme Greed” territory, up from a neutral reading of 56 just one month ago.2
Global fund flows also pointed to a bullishness last week. According to Bank of America’s “Flow Show” report, Japanese stocks saw their largest inflow in 12 weeks, totalling us $2.2 billion, while US stocks saw US$38 billion of inflows over the last three weeks, pointing to the strongest momentum since October 2022.3 Money market funds saw their first outflow in eight weeks, suggesting investors are looking for more risky assets. Unfortunately, European equity funds shed another US $2.4 billion last week, their 14th consecutive weekly outflow.4
As noted, central banks came firmly into focus last week.
Fed
Ahead of the Fed meeting, it was widely expected that the Federal Open Market Committee Meeting (FOMC) would not raise rates, opting to take a break to assess the current situation. On Tuesday, the latest US Consumer Price Index (CPI) report appeared to support this view, coming in at 4.0% in May, the lowest rate of inflation since March 2021. Falling gasoline prices drove the welcome drop. On Wednesday, the FOMC announced it would keep its key interest rate on hold at 5.25% but conveyed a message that it had more to do. The Fed’s updated “dot plot” representation of the planned rate trajectory was taken as hawkish, as it still shows multiple future rate increases. The majority of committee members see at least another two 25 bp hikes ahead, so this appears to be the “pause” markets were anticipating.
However, the Fed remains data-dependent, focusing on both the incoming activity and inflation data. While the latest US retail sales report surprised to the upside, jobless claims pointed to a slowdown in the labour market and Producer Price (PPI) data showed a further deceleration in price pressures. With that, the market is currently predicting a terminal rate of just 5.30% vs. 5.25% currently, suggesting investors do not believe the dot plot, and instead believe the FOMC is attempting to keep a lid on market optimism.
The latest University of Michigan monthly sentiment survey revealed that short-term inflation expectations had dropped to their lowest point in over two years in early June, further complementing dovish expectations and bullish market sentiment.
The S&P 500 Index is now trading above where it was when the Fed started raising interest rates at the start of 2022.
ECB
Ahead of the ECB announcement, the market anticipated a 25 bp hike, followed by a further 25 bps in July, which would maintain the most aggressive hiking cycle ever. The focus for the market was on any indications of what the ECB does thereafter. On Thursday, the ECB did indeed announce the anticipated 25 bp rate hike to 3.5%. The central bank’s inflation forecasts were revised higher, and policymakers noted that indicators of underlying price pressures remain strong.
The ECB’s inflation forecasts for 2023, 2024 and 2025 were all revised higher by an additional 0.1%.5 The 2025 headline and core inflation projections of 2.2% and 2.3% respectively were interesting, suggesting the ECB anticipates more work to be done to reach the 2% target level. It signalled more tightening ahead by talking of just “tentative signs of softening,” stating: “The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target.”6
ECB President Christine Lagarde noted that it is “highly likely” that the ECB will raise rates again in July. So, given last week’s hike and the expectation of a further 25 bp again in July, the question of whether a rate of 3.75% is “sufficiently restrictive” remains to be seen.
In comments since the announcement, ECB policymakers continued hawkish rhetoric. As it stands, market expectations are for a terminal ECB rate of 3.798% in October, suggesting most investors believe the ECB will get to 3.75% in July then pause in September. With the ECB expected to remain data-dependent, it’s worth noting that European gas prices rose by 9.2% last week, which will of course be a factor in upcoming CPI reports.
China stimulus hopes
Reports out of Asia suggested further stimulus for China’s economy, which lifted market sentiment. On Tuesday, the People’s Bank of China (PBoC) cut its seven-day repurchase rate by 10 bps to 1.9%, signalling a shift in the government’s stance, then on Thursday, it lowered its key medium-term lending rates. Chinese economic data has been weak of late, with May Industrial Production coming in at +3.5% vs. +5.6% previous, and retail sales growth slowing to +12.7% from +18.4% in April. New loans also fell short of expectations. We noted last week how the Chinese government had announced a nationwide campaign promoting vehicle sales, telling banks to offer credit support for car purchases. There are increasing signs that the government will increase infrastructure spending, with the State Council of China stating that the government needs to be “more forceful” in its policies to support the economy.
Week in review
Europe
The STOXX Europe 600 Index closed the week up 1.5%, underperforming markets in the United States and Asia broadly. Quarterly performance outside of Europe has been strong, with the S&P up 8%, the Nasdaq up 15%, the Nikkei up 20%, and even the Russell 2000 up nearly 5% despite the US regional banking crisis. In that time, the Eurostoxx 50 was up less than 2%. However, the index is now approaching 4400 once again—we will be watching for a potential breakout in the quiet summer months.
In terms of sectors, the year-to-date winners outperformed last week, with cyclicals stronger overall. Personal and household goods outperformed, with late strength in luxury names following some recent underperformance, and amidst China stimulus hopes. Autos were stronger again last week, continuing the prior week’s strength when China announced support for car purchases.
At the other end, real estate stocks were under pressure again as expectations remain for more ECB rate hikes.
Ahead of the Bank of England (BoE) rate announcement this week, the latest labour market data kept the pressure on. The ONS reported that the UK unemployment rate dropped, whilst average earnings (ex. bonuses) shot up to the highest ever outside of the pandemic. A shortage of workers is the driver behind wage rises. Inevitably, this keeps pressure on the BoE to continue raising interest rates to battle inflation. As terminal rate expectations rose, UK housebuilders and construction names struggled last week. Current predictions are for a terminal rate of 5.78%, meaning a further 128 bps of hikes. Also, the yield on the UK two-year bond jumped last week to its highest since the global financial crisis, surpassing levels reached during the turmoil that marked Liz Truss’s reign as prime minister. The current yield is 4.985%, which compares to a low of just above 3% in March.
United States
As mentioned, the focus in the United States was squarely on the May CPI print and Fed meeting last week. Investors took the weaker inflation data and the first Fed pause in a year as a positive, looking past Fed commentary about future hikes. In that context, US equities pushed on for a fifth week of gains; the S&P 500 Index traded up 2.6%, the Dow Jones Industrial Average was up 1.2%, and the tech-heavy Nasdaq 100 outperformed once again, up 3.8%. The S&P 500 Index closed the week at 4409, having pushed through resistance at 4300 earlier in the week. Market breadth continues to be a focus, with tech heavyweights continuing their march higher and leading sector performance last week, while energy lagged.
Looking at other macro data released last week, the June Empire manufacturing survey, a business conditions survey, was much better than expected, coming in at 6.6 versus -31.8 prior.
Asia
Last week was another good one for stocks in Asia, with the MSCI Asia Pacific Index up 2.7%. Japan’s equity market was the outperformer, up 4.5% and while South Korea’s market underperformed, falling 0.58%.
China
Shanghai’s market had a decent week, rallying late on Thursday and Friday on the back of stimulative central bank actions. Meanwhile, economic news was not as supportive, with industrial output, retail sales and fixed asset investment all growing more slowly than expected in May. The PBoC also rolled over CNY237 billion back into the banking system versus CNY200 billion in maturing loans, which again was seen as broadly supportive of the banking sector and the economy.
Unemployment numbers were also out last week, with the headline rate at 5.2% in May (unchanged from the prior month), but the youth rate at 20.8% remains a real concern.
New home sales in China’s largest cities rose 0.1 in May versus 0.3% in April—still positive news, but it does appear that the recovery momentum in the property sector is slowing, which has fuelled calls for more stimulus.
Sector-wise, food and beverage names rallied ahead of the dragon boat festival, and auto names also outperformed after China called for a boost to car purchases.
Japan
Of the main markets in Asia, Japan was the top performer last week, closing up 4.5%.
A couple of macro things helped. Firstly, although widely anticipated, the Bank of Japan (BoJ) left its ultra-loose monetary policy unchanged; and secondly, we saw better-than-expected export and machinery order data.
Japanese government bonds rallied and the yen weakened slightly on expectations of continued divergence in the monetary policies of the BoJ and the Fed.
Looking at the BoJ meeting, the bank kept its short-term rate at -0.1% and made no changes to its yield curve control program. However, BoJ Governor Kazuo Ueda hinted that when it comes to its YCC program, a certain degree of surprise may be unavoidable, to deal with the changing economic environment.
Week Ahead
Holidays
Monday 19 June: United States
Thursday 22 June: China, Hong Kong
Friday 23 June: Sweden, Finland, China, Taiwan
Macro Week Ahead Highlights
On Thursday, the BoE is expected to hike rates by a further 25 bps to 4.75%. This would mark the UK central bank’s 13th consecutive hike, with financial markets expecting further hikes. The latest UK CPI and PPI reports are out on Wednesday, which could put further pressure on the BoE to continue on with its most aggressive round of monetary tightening in decades.
Eurozone and UK PMIs will also be closely watched on Friday for indications on how Europe’s economies are coping with tighter monetary conditions.
From a political standpoint, US Secretary of State Antony Blinken will visit Beijing on Saturday. Blinken will be the highest-ranking US official to visit China in the last five years. Elsewhere, Germany will host Chinese Premier Li Qiang on Monday, and India’s Prime Minister Modi will begin his state visit to the United States on Wednesday.
Euro-area key events
Wednesday 21 June: UK CPI
Thursday 22 June: SNB Policy Rate; BoE policy meeting
Friday 23 June: UK Retail Sales; Euro-area Flash Composite PMI; UK Flash Composite PMI
Monday 19 June
- US NAHB Housing Market Index
Tuesday 20 June
- Japan Industrial Production (revised)
- Germany PPI
- Portugal PPI
- US Building Permits, Philly Non-Manufacutring, Housing Starts
- Hong Kong CPI
Wednesday 21 June
- UK CPI & PPI
- US Mortgage Applications
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
3. Source: BofA Global Investment Strategy, EPFR.
4. Ibid.
5. There is no assurance that any estimate, forecast or projection will be realized.
6. Source: European Central Bank announcement, 15 June 2023.