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Wait and see (redux)

market snapshot

30 June 2023 |
Active ESGMacro
Recent inflation and GDP data complicate the course of central bank policy.

Fast reading

  • US GDP and jobs data points to higher for longer.
  • German inflation exceeds economists’ forecasts.
  • Fed chair Jerome Powell suggests more needs to be done to hit 2%.

It was a case of ‘steady-as-she-goes’ in markets this week as investors continued to hold out for more clarity on the future direction of central bank policy.

In the US, GDP and jobs data appeared to offer some justification for a more hawkish Fed stance, with real gross domestic product rising at an annualised rate of 2.0% in the first quarter of the year.

Jobs data, too, indicated economic resilience despite recent Fed tightening, with initial state unemployment claims coming in at 239,000 for the week ending 24 June, lower than economists’ expectations and a reversal of a rising trend since March.

In response, two-year treasury yields rose more than 15 basis points to 4.9%, while the 10-year climbed by 13 basis points to 3.8%.1 

Select European inflation reads also raised the prospect of higher for longer. German annual inflation picked up speed in June, hitting 6.8% from 6.3% the previous month and ahead of economists’ forecasts of 6.7%.

Speaking at a central bankers’ conference in Sintra, Portugal, Fed chair Jay Powell was quoted as saying further action would be needed to hit the 2% inflation target. “Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” he said. “The labour market is really pulling the economy.”

The equity view

Lewis Grant, Senior Portfolio Manager, Global Equities, highlights a disconnect between central bank mood music and a more bullish take from investors. “The S&P 500 VIX ‘fear and greed’ index is tracking at the ‘extreme greed’ end of the spectrum and so the Fed’s more hawkish stance is at odds with equity investors’ desire to ‘flip the bull switch’,” he says.  

Against this backdrop, the market  has been rewarding companies that have either a strong balance sheet or product exposure to advances in artificial intelligence (AI), says Lewis. Nonetheless, the geopolitical risk of the AI trade remains difficult to measure. “The price action around the announcement of further semiconductor sanctions from the Biden administration, while unsurprising, suggests geopolitical risk is far from priced in and should be accounted for when considering the global impact AI advances can have,” he says.

In terms of positioning, Lewis highlights the opportunity within the current AI boom but notes the team remains cautious of over-exposure to macro and geo-political risk. To counter this, he says, quality factors continue to be an important part of a well-diversified portfolio.

The macro view

Returning to the question of inflation, Orla Garvey, Senior Portfolio Manager, Fixed Income,  notes that last week’s Bank of England (BoE) rate rise has sent a message that the bank will keep pushing for tighter policy and, as such, has done much to re-establish its credibility. “Given that core inflation is likely to remain relatively flat for the next few months this was an important signal to send,” she says.

“While the inflation upside was driven in some part by volatile categories, this combined with the strength in the labour market suggest that there is still scope to pass through higher prices due to continuing strength in demand,” she adds. “As such we think that the BoE will continue to hike at least through to August when the core inflation numbers are expected to move lower after a period of stability at uncomfortably high levels. “

Credit Suisse: 100 days and counting

In company news, Filippo Maria Alloatti, Head of Financials (Credit), notes that it has now passed 100 days since Swiss bank UBS acquired its peer, Credit Suisse.

“CEO Sergio Ermotti will have his work cut out in the next few weeks as we approach the UBS Q2 results on 31 August,” he says. “Only a fifth of the 160 leadership roles are occupied by former Credit Suisse executives, which perhaps provides a hint as to who will be in charge.”

UBS share price (CHF)

Describing the takeover as a ‘good deal’ with potential long-term upside for UBS, Alloatti nonetheless flags headwinds in the short term. “The combined entity will have more US$100bn+ of HoldCo Senior debt outstanding and most investors will be limiting long concentration,” he says. “There are also tail risks associated with a business model focused on High-Net-Worth individuals (as evidenced by Credit Suisse).”

To learn more about the views of our fixed income team read our latest 360° report.

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