05/13/2024

The response from a favorable combination of events in recent days: a more moderate Fed than expected, the first solid signs of the US labor market cooling, the drop in oil prices, greater geopolitical stability and a positive business results presentation campaign continued to drive the global equity markets, which rose for the third week in a row, and are now on course for the record highs of March.

The strengthening of the soft economic landing narrative has been very significant and investors have consolidated the expectation of two rate cuts by the Federal Reserve in 2024, thus reducing the perceived risk that there might be no cuts, or even that an increase in official interest rates was possible. Market sentiment has improved considerably and demand for equity market hedging has sunk. Volatility has also relaxed significantly across all asset classes.

In the United States, the S&P 500 index closed the week with increases of 1.9%, just over 0.5% from its all-time highs in March. After the storm in April, the restoration of calm suggests that the great US bull market has life ahead. Over the past week, weekly unemployment figures above expectations have strengthened the expectations of a gradual cooling of the labor market, while the number of S&P 500 members who have revealed their quarterly accounts to the market reached 90% of the total. Nearly 80% of accounts have exceeded forecasts by analysts, who have increased their profit expectations both for the current quarter and for the year as a whole. All economic sectors recorded stock market increases during the week, although they were more intense among electricity, financial, industrial and raw materials companies. Growth sectors, such as technology and consumer discretionary, lagged behind in the weekly calculation. Thus, the “value” investment style was dominant, after two consecutive weeks of lower performance, the “growth” style.

In Europe, the stock market week was extraordinary and resulted in gains of 3% on average. In fact, both the Eurostoxx 50 and the Stoxx 600, with greater intensity, exceeded their previous annual highs. The positive inflationary dynamics in Europe, together with the expectation of imminent monetary easing by the ECB and the Bank of England, drove investor optimism. The increases were more significant in the markets of central countries than in peripheral countries and in the electricity, industrial and technological sectors. In addition, the business results published during the week also served to boost investor sentiment. Positive highlights included companies such as AB InBev, and on the negative side, the automotive sector once again with BMW's results. In this regard, the Chinese president's trip to Europe ended without major surprises, although both the European Union and the United States are considering increasing tariffs on Chinese electric vehicles. China will respond with greater or lesser forcefulness, but retaliation is likely, so the sectors most exposed to China are in the spotlight.

With regard to the coming week, in the next few days we will have data giving us a greater insight into the outlook for 2024. Among the most critical data, the April CPI will be important, one of the two monthly figures that the FOMC will have before the meeting on June 12. We expect the core CPI to have eased since March, although the general index will increase due to the rise in gasoline and food prices. The second critical element is retail sales data, which is expected to reflect a greater weakness with respect to the data for the first quarter.

Although, of course, the data might continue to be consistent with the narrative of a soft economic landing, if inflation brings us the fourth consecutive upside surprise, investors will delay the first rate cut, from the two currently estimated cuts. On the other hand, retail sales below analyst forecasts could revive fears of a sharp slowdown in activity and bring forward the Fed's first rate cut. In order to maintain the soft economic landing scenario, therefore, the most favorable combination would be a downside surprise in inflation in April and a slight weakening of retail sales, which does not significantly alter the image of the underlying economic strength of the US economy. Any other combination of surprises could potentially lead to changes in narratives and movements in the global financial markets.

As it depends entirely on the macroeconomic data being published, volatility is likely to remain high in the short term, until we have more visibility regarding the central banks' next moves. However, we continue to expect the scenario of a soft economic landing in 2024, so we maintain our constructive position for another week.