Please see investment bulletin below from Brooks Macdonald received this morning – 27/05/2022.
What has happened
Thursday saw further momentum behind the equity rally which has characterised this week so far. Earnings from Dollar and Macy’s helped continue the rally as both retailers posted positive earnings, suggesting that Target and Walmart’s poorer numbers are not necessarily reflective of the broader consumer discretionary sector. Cyclicals outperformed defensive peers as markets concluded there was still some time left in the current economic expansion.
US Housing sector
During May there has been a significant repricing of US interest rate expectations for 2022. In some ways more remarkable than the quantum of the shift is the fact that the month has seen a shift from a bond market eager to pre-empt a hawkish Fed narrative to one which expects a more accommodative central bank. The repricing has started to filter through to mortgage rates with Freddie Mac reporting that the average 30-year mortgage rate fell by 15bps last week alone. This is particularly important given the weaker housing numbers over the last week which was underlined yesterday by the pending home sales figures which fell more than economists were expecting. Such moves will ease consumer pressures on the margin however until the bond market concludes whether the Fed’s hawkishness is truly softening, these rate expectations are likely to remain volatile.
UK cost of living
Yesterday the UK government unveiled a new package to tackle the cost of living squeeze with c. £15bn of stimulus. The quid pro quo was a temporary windfall tax on the profits of oil and gas companies which have benefitted from higher energy prices. There has been much speculation on whether such a windfall tax would be announced and which companies would be caught, however the announcement led UK utilities to fall, underperforming the broad rally seen yesterday.
What does Brooks Macdonald think
Later today we will see the release of the US’s core personal consumption expenditures (PCE) measure of inflation. With economic growth fears front and centre, markets expect year-on-year declines in the core PCE rate as base effects dampen the annual change. With equity sentiment more buoyant this week, avoiding a large upside beat in the PCE figures will be critical to maintaining this positive backdrop into the weekend.
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Charlotte Clarke
27/05/2022