Weekly podcast – Market overview
This week’s host, Investment Manager, Fraser Wilkinson discusses the market fluctuations of the past week with Head of Fixed Interest Research, Richard Carter. Among the topics discussed – implications of the continued war in Ukraine, inflation, labour costs and what lies ahead.
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Market overview – Richard Carter, Head of Fixed Interest Research
Equity markets enjoyed positive returns last week with the MSCI All Country World Index bouncing from near recently made year-to-date lows to end the week up almost 5%, led by a strong performance in the US. There was not one clear catalyst for the rally, but it appears that a stabilisation in bond yields has helped to unwind some of the oversold conditions caused by sizable declines thus far in 2022.
Economic data from the US suggested the Federal Reserve’s hawkish shift is starting to have the desired effect of curbing inflation by cooling economic activity. The latest purchasing managers’ index (PMI) data showed manufacturing input inflation fall to a five-month low and the prices that companies charge drop to its lowest level in over a year. Headline figures revealed a notable slowdown in activity as the manufacturing PMI fell sharply from 57 in the last month to 52.4, much further than the consensus forecast of 56.0 predicted, while the services equivalent dropped to 51.6 from 53.4 versus a consensus forecast of 53.9. The level which demarks expansion and contraction is 50.
Overall, this was seen as good news on Wall Street with the bulk of the week’s gains for US equities coming after the release and US large-cap stocks ended Friday up around 6.5% on the week. In a broader sign of the recent weakness of US data, Citigroup’s US surprise index, a gauge of whether economic data beats or misses analyst expectations, has fallen to the lowest level since May 2020. The move higher in stocks lifted the US index out of bear market territory and nearly every sector recorded strong gains, although energy stocks were a notable exception as oil declined for a second week in a row.
Fed chair Jerome Powell’s testimony before congress on Wednesday and Thursday seemed to be well received by the markets with stocks gaining into the weekend and bond yields moving lower. After hitting its highest level of the year the week before, the US 10-year Treasury yield decreased nine basis points to end the week at 3.14%, a sizable pullback from a peak of around 3.50%.
UK inflation rises further
The UK consumer price index (CPI) rose to a new peak for the cycle of 9.1% year-on-year in May, coming in line with expectations and edging higher from 9.0% for the previous month. Food costs were one of the driving forces behind the increase, rising at their fastest pace in 13 years. Although a new high was made for the headline reading there was some good news with the core CPI dropping compared to the previous month, coming in at 5.9% year-on-year versus 6.2% prior. The consensus forecast was 6.0%. The Bank of England expect things to get worse before they get better, predicting inflation will get to around 11% in Autumn when the energy price cap is lifted in October.
Economic activity continues to soften with retail sales falling 0.5% month-on-month in May and other consumer confidence data continue to exhibit weakness. The latest composite PMI readings remain at their lowest level in over a year. UK large-caps climbed almost 3% on the week, moving back close to flat on the year. There was also a gain for sterling as the pound rose to end the week at 1.23 against the US dollar. A combination of higher inflation and weak economic data pushed government bond yields lower and the 10-year gilt ended the week down 20 basis points, at 2.30%.
European stock markets ended a three-week losing streak, rising just shy of 3%. French large-caps outperformed their German counterparts, with the latter little changed on the week. PMI readings on the continent were similar to those seen in the US and UK, in that they point to slowing levels of activity. A Eurozone composite PMI fell to 51.9, its lowest level since February 2021, down from 54.8 in May. Falling new orders and dropping business confidence were seen as contributing to the slowdown.
These readings sent core eurozone government bond yields lower, stoking fears of an economic slowdown. The German 10-year bund yield fell 22 basis points to end the week at 1.44%. Peripheral government bond yields broadly tracked core markets. The euro strengthened by around 1% on the week against the US dollar, ending at 1.06.