Weekly house view | Refocusing on fundamentals
Political wrangling over the US debt ceiling may be over for now, but for financial markets the story goes on. After President Joe Biden signed a bill last week suspending the debt limit and averting a default, the next step for markets will likely be an expected bumper issuance of short-term bonds by the Department of the Treasury to re-fund itself. This risks impacting financial sector liquidity if investors rush for T-Bills, depleting banks’ excess reserves as deposits move to the new government debt. But other likely buyers are money market funds, which are sitting on $2.14 trillion of cash parked at the Fed’s Overnight Reverse Repo facility (ON RRP) (on June 2). In the likely case where newly issued US T-Bills offer yields that are above the 5.05% ON RRP rate at the Fed, money market funds will probably allocate some of this cash to the new issuances, thereby decreasing the amount in the Fed’s facility. After the debt deal, markets are also refocusing on economic fundamentals. The Fed has plenty of data to digest: job growth accelerated in May, with non-farm payrolls rising 339,000 on the month, surpassing expectations for the 14th consecutive month. The readout was at odds with other business surveys, and a rise in the unemployment rate to 3.7% from 3.4% suggested the labour market is losing momentum. We expect the Fed to hold rates at its June meeting, and to consider another 25 basis point rise in July.
Saudi Arabia said it will cut oil production by 1 million barrels a day in an effort to boost oil prices, which ended May down 11% on growth concerns. In equity markets, the S&P 500 finished May almost flat. Its top six stocks collectively pushed the index 2.9% higher, but this was mostly offset by falls across the remainder of the S&P 500—an indication of how narrowly concentrated US market performance has become. The top decile of stocks now accounts for 74% of the S&P 500’s market capitalisation. We are underweight US equities and favour active management.
Headline inflation in the euro area slowed to 6.1% in May from 7.0% in April and core inflation moderated to 5.3% from 5.6%. Disinflation is evident but the numbers are still too high for the European Central Bank (ECB), which we expect to raise its main interest rate by 25 basis points to 3.5% in mid-June. Euro area unemployment declined to 6.5% in April from 6.6% a month earlier. Swiss GDP grew by 0.3% quarter-on-quarter in the January-March period, beating Germany’s 0.3% contraction. We expect Swiss GDP to grow by 1% in 2023 and 1.3% in 2024.
Chinese data remain weak. The official manufacturing purchasing managers’ index (PMI) declined to 48.8 in May from 49.2 in April. Services were more resilient. More worryingly, China’s troubled property sector is struggling to recover. This has prompted the authorities to devise new support measures for the sector, which contributed to a rally in Chinese equities at the end of the week.