Weekly View - Target hit

Weekly View - Target hit

The CIO’s view of the week ahead.

Last week confirmed a number of trends, including slowing economic growth and central bank hawkishness. Chinese economic indicators were generally weak, with retail sales, fixed asset investment and industrial production all taking a hit as China’s zero-covid policy penetrates all aspects of economic activity. Japanese GDP growth fell by -1% quarter-on-quarter in Q1 as domestic consumption weakened. While Japanese exports have been resilient, we can expect the reduced activity in China to be eventually reflected in this metric as well. In the US, the Philadelphia and New York Federal Reserve surveys were weak and sentiment among homebuilders was down as rising mortgage rates affect the housing sector in particular. A bright spot was US retail sales, which remained strong in April. In the week ahead, we will be watching out for purchasing manager indices to glean the economic direction and impact of recent events.

On inflation, the UK consumer price index (CPI) hit a four-decade high at 9% in April. Elsewhere, the Japanese producer price index (PPI) surged 10% year-on-year last month, its fastest rate since 1980. In Germany that rate was an eye-watering 34%. Because such elevated PPIs could translate into future CPI prints, this puts pressure central banks to act. The Swiss CPI was 2.5% in April, above the Swiss National Bank’s (SNB) 2.0% target. Hawks at the Federal Reserve reiterated that the central bank must act decisively. At the same time, European Central Bank (ECB) officials are preparing markets for an initial interest rate rise in July, which could be by 50 basis points. As a result, we have brought forward our forecast for the first SNB rate rise to September. Looking ahead, we will also be monitoring food inflation and related policy responses, such as India’s banning of wheat exports.

Developed-market equities ended the week down, with losses centred in the US tech and European indices. While Q1 2022 results were good, with 57% of companies beating sales by at least 1%, margins are starting to take a hit. The biggest shock came from large US retailers, Walmart and Target, which both indicated a potential end to price rises in the US retail sector as customers trade down. Consumer staples companies fell in all markets on fears they will not be able to pass on cost increases to retailers. Meanwhile, Asian markets did well, benefitting from China’s announcement of lower lending rates and hopes for new economic support measures. The combination of low growth and tightening monetary policy has driven bond markets to increasingly price in an economic slowdown, with sovereign yields falling and, more worryingly, high-yield (HY) bonds underperforming their investment-grade peers. The widening of European HY spreads provides a good example of this trend. We are underweight HY bonds. Finally, currency markets largely reacted to the recent US data weakness, with the USD index losing more than 1%, enabling emerging-market currencies and gold to end the week in positive territory. We are positive on gold and other real assets.

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