We are possibly entering a period of consolidation for financial markets, until the next catalyst. After the scary sell-off in early August and the subsequent rally, global equities are more-or-less back where they were in mid-July. And with Nvidia's results now out of the way and lacking the spark for a new jump in its share price for now, there is no real reason for markets to move far away from today's levels. On the contrary, the volatility index (VIX) has remained elevated, showing jittery investors/traders, ahead of the crucial central bank meetings in September. It is, hence, advised to avoid adding to risk, but rather wait for the tricky September-mid October period, when opportunities usually arise. On the contrary, were markets to rally further significantly, we would perhaps consider cutting risk ahead of the US presidential elections.
Global equities moved slightly higher, with Nasdaq dropping 1% for the week and Europe performing much better than the US. The sell-off in semiconductor names after the lacklustre results of Nvidia (compared to blown-out expectations) reinforced the mini rotation which is going on, since essentially mid-July. Investors have been reducing Tech-related exposure in favor of the more cyclical industries and stocks , where Europe is more heavily exposed. As we have said, this makes sense in a rate-cutting environment , but if the rate cuts start getting more aggressive in response to a recession threat, this rotation will be over. At the same time, if there is a steep Technology sell-off rather than just an underperformance, the market will rotate again, this time towards the defensive sectors (staples, utilities, healthcare, Swiss stocks for example). All in all, a well diversified portfolio is needed more than "ever".
Eurozone inflation fell in August, in line with expectations. The headline number declined 0.4pp compared to July, to 2.2% y/y. At the component level, the decline was largely driven by lower energy inflation. Core inflation edged down 0.1pp to 2.8% y/y, also matching market expectations. Looking into the details of Core inflation, it was disappointing to see that services inflation rose +0.2pp to 4.2% vs expectations of an unchanged print. In contrast, goods inflation was better than expected falling 0.3pp to 0.4% y/y . Some chatter lately by ECB officials show an intention to be on the hawkish side in next week's meeting, while still cutting rates. It seems they want to stay "behind the curve" risking pushing the region's economies into a recession.
The US Core PCE (inflation metric) stayed at 2.6%, for the third straight month in the US. The headline number which includes food & energy fell to 2.5%, both numbers coming in as expected. These numbers will reinforce the FED's intentions and pre-commitment to start cutting at the end of this month, although the road to the 2% target has many still many turns ahead.
The 2nd quarter US GDP expanded 3.0% revised up from the 2.8% initial release. Putting the two first quarters together, GDP expanded 2.2% in the first half of this year, cooling from the 3.1% growth in 2023, which is consistent with the "soft-landing" scenario and "insurance" rate cuts happening in the fourth quarter of 2024. Government spending expanded 2.7% in Q2, after the 1.8% in Q1. Despite the rise in government spending in Q2, the average of the first half is much lower than the 4.6% of 2023, and a sign of fading fiscal support. We have highlighted as a main risk for 2025, the potential further drop in government spending which will impact economic growth. In other data, personal spending rose more than personal income again, leaving the savings rate at a very low 2.9%.
Bonds were slightly lower (in price) and yields moved a few basis points higher. As equity markets recovered and the latest macro data were ok, investors took some profits, bringing the US 10-year back at 3.90% and the German equivalent at 2.30%. But we must highlight the fact that the US yield curve is about to become positive again, at the 10-2 level, after having been inverted for the last two years or so. We present more information on that, in the below chart of the week.
Chart of the Week : Will the US curve send the right signal this time ?
The above chart shows the difference between the US 10-year and the 2-year yield, for the last thirty years. A normal yield curve means that short-end yields are lower and longer-dated yields are higher, which means that the 10-2 difference is a positive number and lies above the green dotted line (the zero line). When the difference becomes negative (10yr is lower than the 2yr), the yield curve becomes "inverted". This was the case in 1999, in 2007 and most reccently in 2019. This inversion has been in the past associated with a recession in the next 12-18 months. This inversion happened in 2022, prompting us and most other analysts to ring the alarm bell. A recession has yet to materialize of course, prompting many to believe that it was a "false alarm" this time. Now the difference has approached zero again (curve steepening) and most probably it will become positive again any time soon. Similar moves in the past have been highlighted with red arrows on the above chart. The grey areas are periods of recession, which follow these moves (first inversion and then steepening). Will again this signal prove a false alarm ? Only time will show, but we are again tempted to ring the alarm bell. Our job is not only to manage assets but also to manage the risks.
Disclaimer
• 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/KSH , Photo
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