Financial markets finally regained some appetite for risk last week. However, this trend will have to be confirmed this week so as not to relive the true-false start of mid-May.
The strength of this turnaround can be explained by the excessive pessimism that has prevailed in the markets since the beginning of the year and which exposes people to strong movements at the slightest bit of good news, with investors all in the same direction. This good news finally came from US macroeconomic data which gave credence to the ideal "path" to which Jerome Powell clings, namely monetary tightening which would make it possible to curb inflation without putting the US economy into recession (although a slowdown is inevitable as evidenced by the activity indicators in May).
On the inflation side, the publication of the PCE (the inflation indicator most closely followed by the Fed) has confirmed the recent decline observed in CPIs and reinforces the feeling that the peak of inflation is surely behind us. Even if, as we mentioned in our last communications, this decline is partly explained by base effects and the decline in energy prices. Nevertheless, some "bubbles" are also in the process of deflating such as in real estate where the rise in rates is holding the market back with a further drop in home sales over the month (-16.6% after -10.5% in March) while real estate had until then been a major contributor to the rise in inflation. Moreover, the publication of the minutes of the last FOMC did not bring any surprises and confirmed the trend of the last few days: a 50 bp increase in key rates for each of the next two meetings (the members did not mention a possible increase of 75 bps) in order to be able to slow down the pace of monetary tightening at the start of the school year in September depending on the consequences for the economy. While the rhetoric remains globally hawkish, the central bank's intentions are now well anchored in investor expectations. As for growth, even if it is slowing down, some signals are proving to be rather positive, in particular on consumption, the pillar of the American economy. Thus, over the month of April, household spending increased by 0.9% in value (+0.7% in volume), slightly above expectations, which confirms the good performance of consumption despite inflation. While household incomes once again rose over the month (+0.4% against +0.5% in March), which supported consumption, this nevertheless remained below the rise in inflation. American households therefore have no choice for the moment but to dip into their savings which, at 4.4% in April, are back on the lows of 2008. However, in the longer term, an increase in the real wage will be needed. or a drop in inflation to maintain this level of consumption. At the same time, the noose of containments seems to be loosening in China and the government is stepping up measures to support the economy after the drop in the benchmark interest rate on the real estate market two weeks ago. In Europe, the publication of activity indicators for the month of May confirmed the region's good resilience despite the numerous headwinds.
These developments confirm the relevance of strengthening our exposures for two weeks now. We are also turning positive this week in the US markets which we believe have more upside potential.
