Weekly Market Commentary (May 14, 2024)

Weekly Market Commentary (May 14, 2024)
Weekly Market Commentary (May 14, 2024)

The weekly review of key developments in financial markets and the economy looks back on a positive week for risk assets and asks whether the European economy has finally turned the corner

There is a myth that investors “sell in May and disappear” to take profits and avoid a seasonal decline in financial markets. At least that’s the theory. Clearly, investors haven’t gotten the memo if we take the first part of the month as a benchmark.

Last week was a solid week for risk takers. Government bond curves have flattened, with yields falling more at the long end of the curve than at the front end, and spreads have tightened in corporate credit markets, particularly in high yield emerging markets and investment grade US bonds. Meanwhile, commodities advanced and major stock indexes in the United States, Europe and Asia were mostly higher.

Sweden eases monetary policy

The Swedish central bank, the Riksbank, responded to market expectations by lowering its key rate by 25 basis points to 3.75%, the first cut since 2016. Sweden thus becomes the second central bank in the G10 to relax its policy. monetary this year, the Swiss National Bank having been the first in March.

The Reserve Bank of Australia has left interest rates unchanged at 4.35% and appears in no immediate hurry to move. The Australian futures market indicates that interest rates will remain unchanged until summer 2025 and implies that the long-term neutral policy rate – the real interest rate (excluding inflation) that supports full employment while maintaining constant inflation – should be 3.89%.

The Bank of England is getting closer

The most important monetary policy event this week was the Bank of England (BoE) meeting on May 9. Although key rates remained unchanged at 5.25% for the sixth consecutive meeting, the BoE’s monetary policy committee is moving closer to a rate cut, with a second committee member voting for an immediate rate cut. The other seven members voted for no adjustment.

BoE Governor Andrew Bailey told reporters after the meeting: “It is likely that we will need to reduce bank rates over the coming quarters and make monetary policy a little less restrictive over the forecast period, perhaps even more than is currently reflected in market interest rates” (1).

The overnight interest rate swap market currently factors in a 64% probability of monetary policy easing from June and a neutral long-term interest rate of 3.55%.(2)

On the economic front, the BoE raised its GDP forecast for the UK from 0.2% to 0.5% for 2024 and from 0.75% to 1% for 2025. Following the BoE meeting, The Office for National Statistics has released UK GDP data for the first quarter which has exceeded expectations. The economy grew 0.6% from the previous quarter, the fastest pace since 2021.(3) All subcomponents of growth increased, with foreign trade making the largest contribution, while that domestic demand increased by 0.2%, a positive result after two consecutive quarters of contraction.

Europe: booming?

In a data-poor week – in stark contrast to the previous week, as we highlighted in our last market commentary – the other notable development was the final release of the China Composite PMI. euro zone, which was revised upwards again, from 51 to 51.7(4).

The index thus surpassed its American counterpart4 for the first time in 12 months, offering a new example of the upward surprise of European data in recent weeks. The region is benefiting from a recovery in global manufacturing activity and rising real incomes, while inflationary pressures continue to ease.

On the other hand, the US economy could move in the opposite direction, with the latest data coming in lower than expected. Citigroup’s US Economic Surprise Index – a measure of how economic data is performing relative to analysts’ consensus forecasts – turned negative (see chart of the week). This begs the question: Are tightening monetary policy, ending fiscal support and weakening consumer savings finally working?

Chart of the Week: Were economists too optimistic about the United States?

Source: MacroMicro, as of May 10, 2024, Citi Economic Surprise Index – US

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This material should not be considered a forecast, research or investment advice, and does not constitute a recommendation, offer or solicitation to purchase or sell any securities or to adopt any investment strategy . Opinions expressed by Muzinich & Co are as of April 14, 2023 and are subject to change without notice. All figures are from Bloomberg as of April 14, 2023, unless otherwise noted.

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