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June 3, 2024 - The interest rates discussion is back to haunt us.

With the Q1 corporate results out of the way and the hangover from the AI party kicking in, the focus is now back on the macro-economic reality. New inflation data have shown that the progress has somewhat stalled and the latest macro-economic data are worse than the expected. The next few weeks will provide valuable information on what the major central banks are thinking about this. The ECB meets on Thursday (June 6th), the following week we will hear from the FED (June 12th), then one week later we will find out whether the Swiss National bank will cut rates again and whether the Bank of England will perhaps follow the ECB into cutting rates (June 20th), if the latter does so.

We have mentioned several times the perplexity of the current situation when it comes to making sound investment decisions. Equity markets are discounting an acceleration of economic activity, something which is inflationary at a time when inflation has dropped but still is much higher than the central banks' comfort zone. And if an economic acceleration, which is a good thing to have, is inflationary, central banks not only will not cut rates but they might increase them further. The latter scenario will bring back stress in financial markets. But if economic growth is not going to accelerate, but on the contrary it is poised to slow as consumers are becoming exhausted with high prices, then equity market valuations are neutral to expensive. Central banks will intervene and lower rates in case the economic activity is dipping into a recession, which will then be positive for equity markets. Overall, we stick to the view that the risk/reward has again deteriorated, but no major crash is to be expected.

Inflation rose in the Eurozone slightly more than expected in May. The headline CPI was announced at 2.6% on a yearly basis, up from 2.4% in April and higher than the 2.5% expected. Core CPI, which excludes food and energy, also disappointed, as it increased to 2.9%, higher than the 2.7% of April. Once again, Services inflation, still running at 4%, was the main reason for the higher inflation, as consumer goods' inflation has fallen to less than 1%, at 0.8%. As described in our last week's report the ever increasing cost of insurance, medical care and rents among other services is causing headaches to consumers and to central banks.

The ECB is not going to change course because of the slightly higher-than-expected inflation. On Thursday, they are expected to cut rates by 25bp, but the performance of financial markets afterwards will depend on what they say about any future rate cuts. The latest data gives them the "excuse" to push back on the notion that they will be cutting rates almost every meeting from now on and they will just repeat the mantra of being data-dependent. The bond market has already discounted this, as yields are close to the year's highs and present good buying opportunities.

US inflation as measured by the PCE deflator (personal consumption expenditures) remained stable at 2.7% in April, as expected. This metric has gained importance since 2022 as it is the FED's favorite measurement of inflation. The Core PCE prices rose 0.25% in April, in line with consensus, and leaving yearly inflation at 2.75%, which is the lowest since March 2021, and a touch lower than the 2.82% released in March. The April core PCE prices increase was smaller than any of the prior three months and overall progress on inflation continues to be substantial — a year ago, core PCE inflation was reported at 4.7%. Nonetheless, the progress on inflation has slowed, as core PCE prices have now remained at 2.8% for 3 months.

The US economy's Q1 growth rate was revised lower. Real GDP is now estimated to have expanded 1.3% in Q1, in line with consensus expectations. It interesting to note that new tax record data revised down wages and salaries by $73 billion in Q4, erasing more than half the compensation growth in that quarter. The monthly employment report continues to overstate labor income growth and in our view it overstates job growth too.

The FED Beige Book of economic conditions, revealed that high prices have started to "bite". The report, which offers a qualitative analysis of the economy and is published ahead of each FED meeting, was consistent with what we have been hearing from company announcements and some recent data. Among the findings, the most interesting one was that Retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers. Auto sales were roughly flat, with a few districts noting that manufacturers had to offer incentives to spur sales. Travel and tourism strengthened across much of the country, boosted by increased leisure and business travel, but hospitality contacts were mixed in their outlooks for the summer season. Overall, the report was consistent with an economy which started to get impacted by high prices and a stretched consumer, who is no more willing to buy anything at any cost.

Equities had a second negative week in a row,. Nasdaq climbed to a new record high, only to face significant selling pressure towards the end of the week and finished 1.1% lower for the week. Europe fell also by 1% on average, but the Swiss SMI managed to eke out small gains (0.6%) as large caps such as Nestlé and Novartis attracted investors' interest. Asia also moved lower, with Tech-heavy Hang Seng losing almost 3%, but local Chinese markets fared better (-0.5%).

Bonds were volatile ahead of the central bank meetings, but finished the week on a positive note. The worse than expected US GDP number together with the collapse of the Chicago PMI (manufacturing) brought buyers into the market. The 10-year US yield dropped to 4.50% after having previously touched 4.70%. The German equivalent closed at 2.65%, only 5bp lower from the recent high. The ECB meeting is causing some anxiety, as the possibility of a "hawkish cut" has increased. Or in other words, the possibility of the ECB cutting rates and then disappointing with the guidance for the rest of the year, which might include less rate cuts than hoped.

Chart of the Week : Orange juice can be unhealthy (for your bank account).

As Central banks are still struggling to tame inflation, the Bloomberg Commodity index broke out of a downtrend it had been in place for almost two years. The index peaked around this time of the year in 2022, as the side-effects of the Ukraine invasion had pushed raw materials, metals, agricultural products and other commodities' prices to multi-year highs. Since then, the price for most commodities had fallen, as supply chain issues had largely been resolved and demand was moderating. But things are getting tricky again. For various unrelated reasons the prices of various commodities is on the rise again: Gold is pushing higher by the relentless buying of central banks and especially the Chinese. Oil is moving higher due to the tensions in the Middle East and the continued production cuts by OPEC. Copper is spiking as the investment community realizes its critical importance in creating the necessary infrastructure for electrification, whether it is cars or data centers. And if we move into more everyday products, the price of orange juice has skyrocketed to historic highs, as can be seen in the chart. Orange juice is now 5 times more expensive than just 3 years ago and more than two times higher than the previous highs of 2.0 to 2.5$ per pound in the middle of the previous decade. Drought and disease in places like Brazil have played their role. But the harsh reality is that we still are in the middle of steep price increases for various commodities and products which will affect inflation and could hence influence future central bank action.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : FactSet.


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