Last week was a positive one with global equities rising a bit over 1% led by Europe. Markets are now up some 6% from their early March low in local currency terms and back close to their early February high.
The main focus on the macro front was the US inflation data which proved to be a damp squib with no big surprises. The headline rate fell back significantly in March to 5.0% from 6.0% but the more important core rate was broadly unchanged at 5.6%.
We also had the release of the minutes of the latest Fed meeting. These showed the Fed now expects a mild recession later this year as a result of the recent problems in the banking sector, while acknowledging the heightened uncertainty over the outlook. Even so, recent comments by Fed officials have reaffirmed the market’s conviction that one final 0.25% rate increase is on the cards at their next meeting on 3 May.
Meanwhile, the US first quarter earnings season got off to a better-than-expected start with JPMorgan, Citigroup and Wells Fargo all beating expectations. They have benefited from the rise in interest rates boosting net interest income and also from an influx of deposits as a result of the worries now surrounding the regional banks.
The banks’ forward guidance, however, was cautious and it is the latter to which the market will be paying closest attention this reporting season. Estimates for the S&P 500 have inched higher but the expectation is still that earnings will be down 5% or so compared with a year earlier.
We continue to believe the market is too optimistic on the earnings outlook. With the economy very likely headed into a mild recession, earnings look likely to undershoot considerably the consensus forecast for a 14% gain over the coming year.
Here in the UK, the latest GDP numbers showed the strikes taking their toll, with activity flatlining in February and up a token 0.1% over the previous three months. This drag now looks set to continue for some time with government hopes that the wave of industrial action might be past its worst dealt a major blow by the RCN, the nurses union, rejecting their pay offer.
On a more positive front, the latest data revisions show UK GDP finally back above pre-Covid levels. Unfortunately, the US and Eurozone reached this milestone some time ago with activity in these regions currently 5% and 2.4% higher respectively.
This week, the earnings season will remain a major source of attention. On the economic front, tomorrow’s batch of Chinese data should confirm the strong rebound now underway in that economy. And on Wednesday, hopefully the March numbers should show a modest decline in UK inflation, rather than a nasty upward surprise as was the case last month.
Looking rather further ahead, while the easter bunny may have delivered last week, we do not believe we are out of the woods yet.
Rupert Thompson – Chief Economist