Investors Focus on Economic Data Amid Uncertainty Over Central Banks' Actions

As investors grapple with heightened uncertainty around the extent of potential interest rate cuts, financial markets are keenly monitoring economic data releases.

It took equity markets a mere ten days to digest the higher-than-expected US inflation figures for April and a little over two weeks to subsequently set new record highs.

The rebound was largely driven by broadly solid corporate earnings reports in both the US and Europe. Once again the technology sector led the way with significant gains, publishing quarterly results and future earnings guidance above expectations and significantly ahead of other sectors.

With the earnings season concluded, investors are once again turning their attention to economic data releases and potential rate cuts. Following the Swiss National Bank’s decision to cut rates in March, the European Central Bank took the opportunity to follow suit, as many investors had expected, without any real impact on sovereign interest rates.

In the US, the number of job openings was reported at the lowest level for over three years. Rarely has the US Federal Reserve allowed this indicator to deteriorate for so long without intervening with monetary easing. The fall in the ISM in May reinforced the optimistic sentiment that inflation would fall. However, the disappointment came with the number of non-farm payrolls, which was well above expectations and pushed US 10-year yields back above 4.40%.

If we recall the general outlook at the start of the year, the United States seemed to be the only country capable of reducing inflation and cutting interest rates quickly. Europe was struggling to combat rising prices and investors anticipated a recession. Switzerland managed to keep inflation under control, but at the cost of a very strong Swiss franc which was penalising its exports, and finally China was unable to manage the weight of the property crisis on its economy and stimulate domestic consumption.

Whereas today, the United States is struggling to bring inflation down, while China seems to have passed its lowest point thanks to various support measures. As for Europe, it appears to be in the process of rebounding, despite the uncertainty surrounding the results of the European elections.

The outlook for the equity markets remains optimistic, and every major geographical zone now seems capable of delivering positive returns.

Europe should benefit from the start of a rate-cutting cycle following the ECB's decision on the 6th June, and valuations below the average of the last ten years, although political risk could limit the outlook. The Chinese market is anticipating a recovery in domestic consumption, stabilisation on the property front, as well as a recovery in exports and foreign flows into its financial markets. As for Switzerland, it benefited from the first rate cut in March, enabling the SMI to begin its rebound with a remarkable performance of 6.6% in May.

Lastly, the US market seems to be correctly valued. The economy is certainly showing some signs of slowing, but these are not substantial enough to alter our expectations of two rate cuts between now and the end of the year.

Furthermore, the concentration of performance on large caps is likely to diminish, with a wider range of sectors contributing to market performance, particularly in the United States.

Indeed, expectations for the technology sector (particularly for the Magnificent 6) point towards a normalisation of future earnings growth, to gradually align with the levels of other sectors by 2025.

Credit spreads remain at historic lows. However, persistently high interest rates should start to weigh on the average cost of debt for the most heavily indebted companies. The interest rates offered by bonds, particularly investment-grade bonds, remain fairly attractive in absolute terms, but selectiveness is crucial given such yields are less attractive when considering the offered risk premium.

In conclusion, we can expect each of the major economic zones and a larger number of sectors to make a greater contribution to financial market performance in the weeks and months ahead. ?

In the United States, investors will need to proceed added caution, favouring companies with less debt and supported by long-term growth, in order to anticipate the impacts of economic slowdown and interest rates that remain higher for longer than expected.

Nicolas Bickel | Group Head of Investment Private Banking