2024 Weekly Update

Market update

The S&P 500 closed the week at 5,431.60, +1.58% higher. The Dow Jones closed at 38,589.16, -0.54%, with the Nasdaq lower by -0.01%. The volatility index VIX closed the week at 12.66 up from 12.22. The Euro Stoxx 600 slipped -3.33%.

The 10-year UST closed at 4.22% down from 4.43% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -117bps. US Corporate Bond spreads: Investment Grade spreads widened 2bps at 159bps and High Yield widened 1bp at 341bps. German 10-year Bunds yield closed at +2.36% down from +2.62% a week before. In Europe, Corporate Investment Grade spreads widened 4bps at 125bps and High Yield widened 12bps at 339bps.

The US Dollar Index (DXY) appreciated +0.63% last week and closed at 105.55. The Euro closed at 1.0703 (-0.91%); the Yen depreciated -0.41%, closing at 157.40 and the Swiss Franc appreciated +0.66%, closing at 0.8907. Gold closed at $2,333.04 appreciating +1.71%. Oil was higher, Brent closed at $82.62 (+3.77%) and WTI at $78.45 (+3.87%).

Macroeconomy

US inflation

The May US CPI came in at just +0.16% m-o-m, the slowest core inflation since August 2021, and it was also clearly beneath the +0.3% print expected. That took the y-o-y core CPI print to +3.4% (vs. +3.5% expected), which is the lowest since April 2021. That softness was evident among headline inflation too, which was running at a monthly pace of just +0.01% in May, and the slowest since July 2022. Looking at the Cleveland Fed’s trimmed mean (which excludes the biggest outliers in either direction), it was the slowest monthly print since January 2021 at +0.13%. So, this was a broad-based move lower which wasn’t just driven by a few outlier categories. The report added to the sense that the faster inflation numbers from Q1 were an anomaly, rather than the start of a more concerning trend of faster inflation. Indeed, looking at the last 12 months of core CPI readings, the three fastest months were all in Q1. In terms of producer inflation, monthly headline PPI fell by -0.2% (vs. +0.1% expected), which left the y-o-y number at +2.2% (vs. +2.5% expected).

Fed meeting

The Fed struck a more hawkish tone than expected. They kept rates unchanged, but the dot plot pointed to just one rate cut over the rest of 2024, having signaled three cuts back in March. That was clearly a more hawkish profile, with consensus still expecting two cuts for 2024. The median dot for 2025 was up by 25bps as well, and the longer-run estimate of neutral moved up to 2.75%. The inflation forecasts were also revised up a bit for this year and next, with the core PCE inflation projection up two-tenths to 2.8% in 2024, whilst 2025 was up one-tenth to 2.3%. In the press conference, Chair Powell did not emphasize the hawkish dot plot shift and noted in his prepared remarks that “the most recent inflation readings have been more favorable”. But he also downplayed the CPI print earlier in the day as only one data point and highlighted the solid performance of the economy and the labor market.

French elections

European Parliamentary elections broadly went as the polls suggested: a slight move to the right but with the center holding. However, results were more impactful at a local level as French President Macron called a snap legislative election which will take place in two rounds on June 30th and July 7th. This is after his party trailed with 15% in the European Parliamentary (EP) elections with Le Pen's National Rally (RN) winning 32%. Although this was broadly in line with expectations, Macron is likely hoping to win back some momentum and hope a notable part of the EP results were a protest vote and encourage other centrist parties to help rally round to limit the charge of Le Pen. His other hope would be that if RN have a bigger part in government, their appeal may diminish before the next Presidential elections in 2027. There are three things to watch between now and the first round of the French election on 30 June. 1) Voter intentions: the polls suggest a significant increase in turnout, between 10 and 20 points compared to the actual turnout of around 50% in the European elections and the last legislative elections in 2022; 2) The programmatic announcements of the National Rally, which have so far remained evasive. However, to reassure the business community, Jordan Bardella has indicated that a new pension reform lowering the retirement age from 64 to 60 will not be included in the program; 3) Negotiations on possible coalitions are also key, particularly to secure a place in the second round in each constituency and then to secure favorable vote transfers to win the second round. On this front, the radical left, the Greens, and the Socialists seem to be close to an agreement, while the alliance between Les Républicains and the RN has been ruled out by the party, leading to the exclusion of the LR president. On the Macronist side, the most important announcement is that Emmanuel Macron has ruled out the scenario of resigning in the event of defeat in the legislative elections.

ECB speakers

ECB officials struck a cautious tone on future rate cuts. For example, Slovakia’s Kazimir said that September “will be the right moment to reassess our stance and decide whether we need to adjust our monetary policy settings.” So, the implication is that the next meeting in July would be too soon. Separately, Bundesbank President Nagel said that “I don’t see us on a mountain top from which we will inevitably come down”, and instead he viewed it as “a ridge where we still have to find the right point for a further descent.” Finally, Lagarde said in an interview that “We’ve made the appropriate decision, but it doesn’t mean interest rates are on a linear declining path”. Those comments added to the sense that the ECB was not going to rush future rate cuts, and that narrative got further support from another rise in commodity prices.

China inflation

China CPI disappointed as it rose +0.3% y-o-y in May, vs. expectations for a rise of +0.4%. PPI contracted -1.4% y-o-y in May (vs. -1.5% expected), marking its smallest contraction since Feb. 2023 and up from last month’s -2.5% decline. It has been negative for 20 months now though. There has been intense discussion around deflation in China since last year, which is undeniable low and undesirable at current levels. In particular, low inflation in China primarily reflects weak demand especially in broad consumption, along with drag from food deflation, over-capacity in some industrial sectors, and global commodity prices dynamics. CPI is expected to marginally pick up this year with PPI deflation narrowing but may take a few months to turn positive.

Highlights

On rates

10-year euro periphery and French sovereign bond spreads against the German Bund widened in the wake of the announcement of snap elections in France. The Franco-German 10yr spread rose +28.6bps over the week (and +6.9bps on Friday), bringing it to its highest level since November 2012, and its largest weekly increase since late 2011 during the Euro crisis. The spread is now above 76bps. Its Italian counterpart is up as well to 146bps. The 10-year Bund fell -10bps to 2.36%, with the yield curve steepening over the week. Market participants expect both the ECB and the BoE to cut rate by 50bps this year. Rates were also volatile in the US. 10-year and 2-year Treasury yields fell -21.2bps and -18.3bps over the week to 4.22% and 4.69% on the back of softer inflation number and strong jobless claims. Market participants now expect 44bps of Fed rate cuts by year-end with 65% chance of a cut in September.

What to watch

• Monday: China Industrial Production (May), Retail Sales (May); France parliamentary election campaign starts; US Empire Manuf. (June)

• Tuesday: Germany ZEW Survey (June); US Retail Sales (May), Industrial Production (May); Reserve Bank of Australia Policy Decision

• Wednesday: UK CPI (May)

• Thursday: Bank of England; Eurozone Consumer Confidence (June, prel.); Swiss National Bank policy rate; Norges Bank; US Housing Starts (May)

• Friday: Japan CPI (May); UK Retail Sales (May); US Existing Home Sales (May); Japan, UK, Eurozone, US PMI (June, prel.)