A summary of the latest trends in the markets (June 2024)
May was a volatile, but positive month for both equities and fixed income. In the first few weeks, the Fed confirmed their cutting bias at its May meeting. Additionally, softer U.S. employment and CPI reports for April once again increased hopes for a soft landing. Later in the month, inflation worries, heavy Treasury issuance and stronger-than-expected PMI data caused concerns the U.S. economy may be running too hot. This led bond yields to move higher and caused jitters in equity markets. While global bond yields ended the month almost 10bps lower at 4.0%, volatility in fixed income markets brought the global bond Aggregate return to -3.3% year-to-date. For equities, developed market equities rose 4.5% during the month while emerging market equities increased 0.6% The tactical rally in China continued with Chinese equities up 2.4% during the month, but concerns around sustainability of the rebound remain.
Investors continue to be sensitive to any incoming U.S. economic data. Early in the month, markets cheered the April CPI report, which showed a small but welcome moderation in headline inflation to 3.4% y/y, after a streak of surprisingly strong prints in the first quarter. The April PCE report also came in slightly softer but was still firm enough to keep the headline rate at 2.8%. Both reports soothed market fears about a reacceleration in inflation and suggested prices should continue on a gradual, non-linear path to the Fed’s target. Meanwhile, economic activity data came in mixed. The April employment report suggesting further normalization in the labor market, while the Q1 GDP results and April retail sales revealed a moderating (but still solid) pace of consumption. On the other hand, U.S. flash PMIs surprised to the upside, with the composite index moving up to 54.4 from 51.3, the highest reading in 25 months. Investors should avoid reacting excessively to any single data point and not follow the swings in market sentiment. Overall, the economic outlook for the U.S. economy remains solid, characterized by an expected moderation in consumer spending and gradual disinflation. As a result, the Fed remains data dependent, and rate cuts are still a matter of “when” not “if”. Markets are currently expecting 44bps of rate cuts in 2024 with a 77% chance of a cut by the September meeting.
In Europe, economic data has continued to show decent momentum, with the Euro area composite PMI climbing to 52.3 in May. This signals that the economy is now running at a 1.5% annual pace. Ahead of the June ECB meeting, both headline and core inflation reaccelerated in May, primarily driven by services. Despite the upside surprise, markets still see high chances for a June cut and are pricing in around 60bps of cuts by year end. The start of a gradual easing cycle, combined with the gradually improving economic data, could be supportive for European equities, whose valuations still have a high discount of 30% compared to the U.S. In Japan, yen weakness has been catching attention. The Bank of Japan Governor signaled rate hikes could be necessary if yen weakness continues to contribute to domestic inflation pressures. Beyond currency concerns, the structural changes impacting Japanese markets, such as the return of positive interest rates and corporate government reforms, are transforming corporate profitability and making Japan an attractive market to investors. Overall, investors should continue to monitor opportunities in international markets given positive cyclical and structural trends.
Markets also remained focused on China’s growth and policy implementations. The government’s recent support has been encouraging, with the announcement of strategic issuance programs to invest USD 130 billion in the real estate market and efforts to increase liquidity in financial markets. China equities have rebounded an impressive 34% since the January low, but a stabilization in property prices and confidence levels are crucial for any rally to be sustainable.
While interest rate volatility has weighed on bond market performance this year, the rise in yields has improved income returns for Treasuries and corporate bonds. With the Treasury yield curve likely to remain inverted through the end of the year, short and intermediate duration assets can still play a part in portfolios. However, investors should still be mindful of reinvestment risk in the ultra-short part of the curve and look to gradually extend duration to lock in yields at 15 year highs. Meanwhile, U.S. high yield is becoming more attractive due to the improved quality of high yield indices, attractive yields, and a low risk of a recession in the next 12 months.
For U.S. equities, May was a strong month, up 5.0%. Interestingly, defensive sectors like technology and utilities were the best performers during the month, partially driven by enthusiasm related to artificial intelligence and mixed macro data. The easing of monetary policy combined with a solid nominal GDP growth and earnings outlook should continue to provide a constructive backdrop for U.S. equities. Nonetheless, we still favor quality and stock selection to identify the attractive companies with resilient profits, solid balance sheets and favorable relative valuations.
The uncertain timing of rate cuts and trajectory of the global economy underscore the importance of diversification and risk management. Just as important is not following the dramatic swings in market sentiment and sticking to one’s investment plan. The opportunities that exist in fixed income (like taking advantage of high income returns), U.S. equities (broadening out of performance in the S&P 500 Index), and international equities (corporate governance reforms and structural tailwinds) all reinforce the importance of stepping out of cash and adding exposure to interesting sectors and regions.
Snapshot of the economic and market update for the second quarter of 2024
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