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May 27, 2024 - Summer is approaching, with too much complacency.

We are entering the first month of the summer, with equity markets at or around their record highs. At the beginning of this month we wondered whether the "Sell in May and go away" cliché is still valid and our quick answer was no. That has proved beneficial for portfolios so far, as markets have rebounded nicely after the April slump. But we moved up again too soon too fast and we are now entering a tricky season, where people leave for vacations, market activity slows down and volumes start to drop. We are entering this season with the VIX index (volatility index) at the lowest level in more than 4 years and all we talk about is Artificial Intelligence and Nvidia. Admittedly, the AI is not a hype but a true revolution, with unknown consequences at this time. But we cannot let our euphoria cloud our focus on other real issues that the global economies still face: record credit card debt in the US, huge fiscal deficits and the highest interest rates in more than two decades which are going to stay high for long as the inflation beast is not yet tamed with certainty. We would advise to be alert.

We are also moving closer to decision time for the world's major central banks. The ECB meeting is already next week (June 6th) and it should bring with it the first rate cut, as it is very well telegraphed by various ECB officials and the last meeting's announcements. This is, however, already discounted in current bond and equity prices, so it should not, in principle, provide any new flows into markets. The catalyst will be what the central bank will say for the rest of 2024, as the market still believes that there will be another two or even three rate cuts until the end of the year. The risk of a "hawkish-cut" is very high, or in other words the risk of the ECB cutting rates but sending the signal that it will not move again anytime soon. This will hurt bonds and equities.

The FED meeting then comes on the following week (June 12th) and no rate cut is expected. Again, this is well transmitted to the markets by the FED's guidance, official and unofficial. The deciding factor for the markets' performance would be whether the FED will provide any hint for any rate cuts this year, with the most probable outcome is to leave all options on the table, including that of possibly raising interest rates if inflation does not fall significantly in the next 3-6 months.

We received the minutes from the May 1st FED meeting last week, which corroborated the above observations. They noted that participants remained highly attentive to inflation risks, but with a general belief that inflation would return to the 2% target over the medium term. According to the minutes, "Participants discussed the risks and uncertainties around the economic outlook. They generally noted their uncertainty about the persistence of inflation and agreed that recent data had not increased their confidence that inflation was moving sustainably toward 2 percent". Participants discussed maintaining the current restrictive stance for longer, with various participants also mentioning a willingness to tighten policy further should more inflationary pressures materialize. Of course, we should highlight that these minutes are three weeks old. Since then we have received worsening macro-economic data (GDP, Retail Sales, labor market weakness) and Mr. Powell has also highlighted the high bar for Fed rate hikes.

The April US inflation numbers were announced in-line with expectations, bringing some short-term relief to the markets. The headline number increased 0.3% for the month with 12-month CPI inflation edging down to 3.4%, from 3.5%. Looking into the details, food prices were roughly unchanged in April with prices for food at home (i.e. groceries) declining and prices for food away from home (i.e. restaurants) picking up. The Core CPI also rose 0.3% with the 12-month core CPI change slipping to 3.6% from 3.8% in March. Among the components, owners' equivalent rent (OER) continues to increase solidly, with a 0.4% increase in April, showing that unfortunately the disinflation process in OER has stalled since August of last year.

The ECB reported that negotiated wages in the Eurozone increased in Q1 2024 to 4.7% y/y from 4.5% in Q4 2023. But it also highlighted that according to their wage tracker data which are based on job postings, the negotiated wage pressures are moderating. These data showed that wage growth declined from 5.1% in October 2022 to 3.4% in April 2024. We should note that the ECB's view on wages has evolved since March. Back then, "strong wage growth" was seen as a key inflation driver. However, by April, the outlook softened to "gradually moderating" wages, influenced by forward-looking indicators like their own ECB-wage tracker and other business surveys. These indicators, combined with past data analysis, suggest a potential slowdown in Q1 wage growth to 4% versus 4.5% in Q4 2023 and hence ECB officials sounded less alarmed.

The Eurozone Composite May Purchasing Manager Index (PMI) recorded a 12-month high at 52.3 versus expectations for 52.0 and compared to 51.7 in April. This was the highest level since May 2023. In contrast to the last few months, when the services sector was driving the improvement, the increase in May was solely driven by the pick-up in manufacturing. Specifically, the Manufacturing PMI was up 1.7 points to 47.3 (consensus: 46.1), the highest since February 2023 although still in contraction territory. Manufacturing remains in contraction, yet the PMI improved to 47.4 versus expectations for 46.20 and 45.7 in April. The Services PMI came in at at 53.3 versus 53.6 of expectations and unchanged with respect to April. The increase in the Eurozone Composite PMI comes on the back of an increase in Germany but a decline in France.

The US PMI numbers were better than expected, primarily in Services. The Manufacturing PMI improved to 50.9, better than the expected 49.9 and higher than the 50 of the previous month. Services rose to 54.8, much better than the expected 51.5 and 3.5 points higher than the 51.3 of April. Still however, in absolute numbers the current level of services appears to be rather depressed, for an economy that is supposed to be booming, as per the GDP report and the low unemployment number.

It was a down week for global equities, but felt that it was positive because Nasdaq moved to a new high. The Nvidia results sparked a rally in Tech names , but the rest of the market lost ground last week. The Dow Jones index fell by 2% and Small Caps (Russell 2000) fell 1.2%, while Europe fell by about 0.8% on average. China (-2%) and Hang Seng (-5%) were among the worst performing markets after weeks of outperformance. In terms of sectors, Technology was the only positive one, with Energy (-2.3%) and Consumer Discretionary (-2%) the worst.

Bonds had yet another volatile week, losing some ground. The better than expected PMI numbers put pressure on bond prices, as good macro data are seen as an excuse by the central banks to delay rate cuts (and the opposite holds true, bad macro data will bring rate cuts sooner). But the overall picture remains that of worse-than-expected economic data, as evidenced by the Citi Economic surprise index, which has fallen sharply both in the US and Europe in the last three months. This puts a natural cap on bond yields, as investors are for the moment buying the weakness. The US 10-year is now trading at 4.45% and the German equivalent slightly below 2.60%.

Chart of the Week : US Inflation in many everyday expenditures is moving steadily higher again.

The above, rather busy chart by Apollo Management, shows the evolution of the so-called Super-core CPI in the US (green line), for the last four years (and its components). The Super-core CPI is an inflation metric that excludes consumer goods, energy and food costs. It includes expenditures which are primarily service-oriented but excludes the rents, which play a significant role in the calculation of the Core CPI number. Super-core CPI includes items such as medical care, insurance costs, recreation, transportation, education, a significant part of a household budget. It is very apparent that inflation on these significant items has been rising steadily since the end of last year and has reached 5% again. It is no surprise that the FED does not feel comfortable with cutting rates anytime soon, although the drop in energy prices as well as in many consumer goods have been a positive contributor to keeping the headline inflation moving even higher.


• 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 : Apollo Management.


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