Summer solstice for international markets

The week ended with new highs for the DAX industrial index and gains for all three Wall Street indices, as the S&P 500, the parent markets, posted its biggest weekly gain since March.

Since the beginning of 2023, the S&P 500 has risen by 15% and the Nasdaq by 32%, mainly supported by the jump of GenAI technology. You can read more here).

In contrast, the Dow Jones posted a slight increase of 3.6%. For those wondering about this different spread of the upside, we believe the answer lies in the fact that the latest macro data is mixed to say the least, clearly leaving us none the wiser on the interest rate outlook.

So while money that has been “set aside” by recession fears is returning to the markets as the fears fade, it is clear that managers choose to position themselves in sectors with clearly increasing turnover and good profit margins ahead of them and without limitation. Leverage and many more debt refinancing in the coming years.

This sorting between sectors and companies is more evident in the current bull cycle and is a clear point of differentiation from previous bull cycles where buying interest has spread across the market spectrum.

What we learned this week

Structural inflation continues

Although the spotlight was on central bank decisions, the important news for this week was different.

First, the annual headline inflation rate in the US came in at 4% from 4.9% in April while analysts had expected a reading of 4.1%. On a monthly basis, it came in at 0.1% from 0.4% in April, in line with analyst estimates.

You might think the numbers are remarkable, as 4% is the smallest annual increase in the US inflation rate in two years.

But once we get to the elements of structural inflation, “the recipe falls apart.”

As you can see, structural inflation, that is, excluding food and energy prices, is set at an annual rate at 5.3% Against 5.5% in April and while analysts had expected a reading of 5.2%. On a monthly basis, core inflation came in at 0.4%, the same as in April and within analyst estimates.

Thus, the hard part of inflation is proving to be very constant.

In this week’s positive news on inflation expectations, we note that US producer prices fell more-than-expected in May, while jobless claims continued to rise, indicating weakness in the labor market and raising hopes that the Fed will be less aggressive. However, US retail sales, excluding automobiles and gasoline, rose more-than-expected in May.

– Continued instability in the energy market

There is another unpleasant footnote. Any improvement in the headline inflation rate in both the US and Europe came mainly from slowing energy prices.

However, this de-escalation is not a given. See, for example, what has happened since the beginning of June with regard to natural gas prices. In the US, prices have risen 20% since the beginning of June, while in Europe, natural gas rose from €26.8/MWh on June 1 to €41.14 on Thursday, before falling to €32.77/MWh manufacturing.

The high volatility of the natural gas market clearly indicates that the market is still volatile and volatile. Therefore, no one can rule out new adventures.

The rise in prices since early June depends largely on the Dutch government’s intention to shut down Europe’s largest natural gas field on October 1, a move originally planned for 2024 as seismic activity and disasters continue in the broader region in which it is located. At the same time, Norway is reducing supplies to European markets, while particularly warm weather in northern Europe is increasing demand.

Although full storage facilities for the season and weak demand from Asia so far indicate that we are far from swinging prices to the dire levels of summer 2022, market volatility remains at levels seen since the height of the crisis.

This volatility is itself a major problem for the market, as volatile prices create hurdles both for industrial clients trying to return to a smooth state and for central banks trying to assess whether any progress in inflation is sustainable.

Any further rise in energy prices would essentially undo any progress so far and force them to push for tighter rates in the future to keep inflation in check.

Now add the risks of a warmer-than-usual summer, increased demand for cooling power, a prolonged drought that dries up rivers and puts hydropower out of business while also causing problems for nuclear power generation, or increased demand from China, which is currently facing a weaker-than-expected economic recovery, and you get it. Any advance in inflation from low energy prices is all too easy to blow up.

Disguised central bank pessimism

Both the European Central Bank and the Federal Reserve are aware of these risks, which is why even the latter, which this time left interest rates unchanged, left open the possibility of two more increases of 25 basis points each, in 2023.

Let’s take a look at the main points from this week’s monetary policy decision texts.

The European Central Bank on June 15 raised interest rates by 25 basis points – now the deposit rate at 3.5% – with Christine Lagarde warning at the press conference that Inflation is expected to remain high for a very long timeWhich paves the way for another rate hike at the next meeting in July.

The Fed on June 13 left intervention rates unchanged in the 5%-5.25% range, as expected, but according to its members’ estimates, two more increases will be needed by the end of 2023.

As a result, the average estimate for the key interest rate now stands at 5.625% from 5.125% in March. More importantly, the average estimate for 2024 was also revised upwards to 4.625%.

Fed Chairman Jerome Powell, in his remarks after the meeting, said so The possibility of lower interest rates during 2023 seems unlikely, Sending a signal in all directions that the uptrend cycle is not closed.

In fact, Powell reported it to us Almost all committee members see fit to raise rates further by the end of the year, despite the fact that at this meeting they saw fit to leave them flat in order to allow the current increases to work their way through the economy. (PS: The market is already pricing in the possibility of a 25bp increase in interest rates in the July session with a probability of 67%).

Powell also indicated that he expects this The contraction will come from the housing market as it is estimated that rents will drop.

Evacuation responsibilaty

This material is provided for informational purposes only. It should in no way be taken as an offer, advice or solicitation to buy or sell said products. Although the information provided is based on sources believed to be reliable, no guarantee is given that it is complete or accurate and should not be relied upon as such.