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Delayed but not derailed

César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.


US stocks got a late-week boost in the form of significant cooling in the nonfarm payrolls report for April as well as a slowdown in wage growth. Reassurances also came from Fed chairman Jerome Powell, who said it was “unlikely” rates would be raised again. Better-than-feared sales figures and a share buyback from one of the Mega Tech stocks also helped the S&P 500i emerge from its sluggishness to register a slight 0.6% gain over the week (in USD). Despite improvements in euro area Q1 GDP and April inflation reports, the Stoxx Euro 600 ii declined 0.3% (in euros) whereas Asian equities (ex Japan) continued to power ahead, driven by China. Powell’s relatively dovish comments and the April jobs report provided relief to US Treasuries, with smaller declines in European bond yields. The Japanese yen rebounded strongly on hints at official intervention while the Fed’s perceived dovishness also weakened the USD against other currencies.


“I don’t see the ‘stag or the ‘flation,” Powell said on 1 May of the risk of stagflation. “I think it’s unlikely that the next policy rate move will be a hike”.


US nonfarm payrolls rose by 175,000 in April, down from a revised figure of 315,000 in March and short of consensus expectations. The unemployment rate ticked up to 3.9% from 3.8%. Average hourly wages rose at an annual rate of 3.9% in April, down from 4.1% in March.

Euro area GDP growth picked up in Q1, to a quarter-on-quarter rate of 0.3%, compared to -0.1% in Q4 23. Germany saw a significant rebound in quarterly growth in Q1, to 0.2% from -0.5% in Q4 23. Headline inflation in the euro area remained unchanged in April at an annual rate of 2.4%, but core inflation sank to 2.7% from 2.9% in March.

The official purchasing manager index (PMI) for Chinese manufacturing for April came in at 50.4, slightly down from 50.8 in March, but the Caixin purchasing PMI rose to 51.4 from 51.1. The official non- manufacturing PMI dropped notably to 51.2 in April from 53 in March.


Slower US jobs and wages growth, together with more dovish than expected comments from Powell, point to a patient, data-dependent Fed. Powell’s announcement on the size and timing of tapering of the Fed’s quantitative tightening policy was also slightly better than expected, helping markets. In our view, rate cuts are delayed not derailed. We expect two cuts this year, starting in July. The next big data release will be US inflation on 15 May.

In markets, our 2024 themes of M&A and buybacks are being reinforced by further activity, including a cash offer for a US entertainment company and a European bank takeover bid. Last week saw some big buyback announcements, including the biggest in history. A convertible bond offering at a 37.5% premium shows that, with valuations high and funding costs very high, such issues are an interesting option for companies to fund themselves.

We are raising our euro area full-year growth forecast from 0.6% to 0.8% after the stronger-than-expected Q1 numbers. Short-term, both macro and micro developments favour risk assets. Yet markets may fear a slowdown and reprice geopolitical risks later. We are overweight gold.


Author PFI

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