Nasdaq Rises on Disinflation: Weekly Market Update and Analysis

The problem of the debt ceiling in the United States or the possible deterioration of Italy do not seem to worry market operators, focused on the possibility of a cut in rates by the Fed this summer. US inflation, now below the 5% threshold, maintains the hope of a reduction beneficial to growth stocks. The Nasdaq gained 3% over the week, with a preponderance of the largest caps. In Europe, stock market indices are flat. Fixed income markets remain volatile. The T-note fluctuates between 3.30% and 3.50%. Sovereign or credit spreads are stable over the past week. However, there are persistent tensions on the swap spread in the euro zone. On the foreign exchange market, the dollar allows itself a slight rebound. The euro struggles to cross the threshold of 1.10 dollars. The New Zealand dollar is correcting on lower inflation expectations which may dampen the action of the Reserve Bank of New Zealand. The Bank of England (BoE) carried out another 25bp rate hike.

The Jackson Hole meeting, scheduled for the end of August, is already shaping up to be a possible turning point in Jerome Powell’s communication for 2024.

Solid results for European banks

In economic terms, US inflation (CPI) came out at 4.9% in April. Excluding energy and food, inflation remains virtually stable at around 5.5%. Rents (actual or imputed to landlords) should begin to decline during the second quarter, gradually bringing underlying inflation back to 4% at the end of the year. The prices of imported goods are beginning to fall. Price dynamics will mainly depend on the evolution of labor costs and the behavior of corporate margins. The excess demand for labor seems to be reabsorbed through a reduction in vacancies or an upward shift in jobless claims and redundancy plans. This easing of the labor market is a necessary first step towards lasting disinflation. However, household inflation expectations still need to be monitored in the United States and in Europe, where the European Central Bank (ECB) survey reports an increase in expected inflation. The ECB still needs to act on rates, probably twice by July. The BoE raised its rate by 25bp to 4.50%, despite two dissenting votes preferring a status quo. UK GDP was up 0.1% in the first quarter, thanks to a surprising contribution from private investment. Household consumption is penalized by inflation, but the loss of purchasing power should ease over the course of the year. The BoE’s optimism on inflation raises questions, however, especially since the monetary institute no longer foresees a recession in 2023 (+0.25%). In China, consumer price inflation was zero (+0.1% in April) and producer prices fell by more than 3%. In this context, China is once again exporting disinflation, which we are seeing in the United States. The recovery in industry has turned out to be less strong than expected, so that the prices of industrial metals have been plunging again for the past few weeks.

Equity markets are hanging on to a hypothetical drop in Fed funds. The Jackson Hole meeting, scheduled for the end of August, is already shaping up to be a possible turning point in Jerome Powell’s communication for 2024. The markets are still impatient and the monetary status quo envisaged until the end of 2023 could justify a correction in multiples. On the contrary, it is indeed the stocks most sensitive to interest rates that lead the rating. The performance gap is striking between the first five values ​​of the S&P 500 and the rest of the rating. Speculative positioning, still largely short, has been reduced since the end of April. The pressure on US regional banks continues and the market is attacking the most fragile files. The European indices are digesting a season of good results, overall. European banks stand out with solid publications.

On the Treasuries market, volatility remains substantial. The 2-year returns below 4% after the price index, causing the 10-year to fall to 3.40%. On the other hand, the steepening of the 10-30 year segment (34bp) has been confirmed for several weeks and has reached the peaks of July 2022. In the euro zone, the Bund is moving within a range of 2.20% to 2.50%. The Bund’s scarcity effect has tended to widen swap spreads since the lowering of deposit remuneration to ESTR -20bp. This temporary measure cannot replace an ECB securities lending policy closer to market standards. The 2-year swap spread is traded above 80bp, i.e. banking crisis levels.

The credit market performed well this week with a slight tightening of spreads. The balance of flows, or even the level of spreads, could push spreads wide over the next few weeks. The primary market was active with more than 16 billion euros in issues from non-financial companies over the week. The total of the 20 financial transactions adds 14 billion euros. High yield even tightened by 3bp to 515bp against Bund.
On the foreign exchange market, we note a rebound of the dollar despite the anxiety-provoking deadlines linked to the debt ceiling.