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Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning:

What has happened

Markets looked to be in a holding pattern on Monday, ahead of key US Consumer Price Index (CPI) inflation data due out tomorrow. Helping to dampen the mood a little, was some caution from US Federal Reserve (Fed) Vice-Chair Philip Jefferson. Jefferson said yesterday that the Fed should keep interest rates in “restrictive territory” until it has “additional evidence” that inflation is moving toward target. Staying with the US, later today we have retailer Home Depot’s earnings results – along with fellow retailer Walmart due on Thursday, these are two of the most important corporate barometers for the US consumer, so it should provide us with a lot of information about how the US consumer is doing ‘at the coalface’. Finally, earlier this morning, UK labour market data just published has shown wage growth remaining strong. UK annual (nominal) regular pay in the 3-months-to-March is up +6.0%, unchanged from an upwardly revised 3-months-to-February, and above expectations looking for +5.9%. At the edges, this wage data will likely push back a little on the chances of seeing a June rate cut from the Bank of England.

European banking consolidation gets a possible green light

It’s been busy in the European banking sector lately. Last week, we saw a hostile Eur11.5bn all-share offer surface between two Spanish banks, with BBVA seeking to acquire its smaller rival Sabadell. But while the Spanish government has been quick to criticise BBVA’s approach, it is interesting that other European governments might take a different view to possible banking deal activity in their own markets. In a Bloomberg interview yesterday, French President Emmanuel Macron said he would be open to seeing a major French bank being taken over by a European Union rival because “dealing as Europeans means you need consolidation as Europeans”. According to Bloomberg, Macron’s logic is that such a move would spur the deeper financial integration which he sees as critical for the European bloc’s future prosperity. While European banks have seen good relative-market performance lately, valuations, at meaningful discounts to book value for the sector in aggregate, arguably still offer upside potential.

New York Federal Reserve survey sees inflation expectations pick-up

A survey out yesterday has seen a pick-up in consumer inflation 1-year-ahead expectations. The survey, from the New York Federal Reserve, on Monday, showed consumer prices are expected to be up +3.3% over the next year. That’s a pick-up from around the +3.0% mark over the previous four months and is the highest reading since November last year. Later today, the US inflation ‘news-train’ continues with US Producer Price Index (PPI) inflation due, before the all-important US CPI data lands tomorrow.

What does Brooks Macdonald think

Fed officials have been clear that they want to see more evidence that inflation is falling before they cut rates. Not only this but, in particular, they want to see evidence that inflation is moving sustainably towards their 2% target. If that’s the hurdle to get over, yesterday’s pick-up in surveyed consumer inflation expectations is not helpful. Meanwhile, the number of 0.25% cuts from the Fed expected by markets this year is currently stable at between 1-to-2, though this is a long way south of the 6-to-7 cuts that were priced in at the start of this year. With markets having already moved a long way already this year to discount the Fed’s current caution, interestingly, it could leave upside risk for Fed interest rate cut-hopes should US inflation data come in lower-than-expected over the next 2 days.

Bloomberg as at 14/05/2024. TR denotes Net Total Return.

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Andrew Lloyd DipPFS