Please see the latest Investment bulletin from Brooks Macdonald received today – 30/06/2022
What has happened
US equity markets ended broadly flat yesterday as the positive effects of quarter-end rebalancing were offset by further concerns over the aggressive zeal of central banks to tame inflation.
Central bank panel
Fed Chair Powell, ECB President Lagarde and BoE Governor Bailey all stressed their commitment to tackle inflation and acknowledged that there will likely be economic pain in order to achieve that goal. In terms of particular takeaways, Lagarde said that she didn’t think ‘we are going back to that environment of low inflation’, suggesting that post pandemic ECB policy may be structurally tighter than we have seen in the last decade. Powell interestingly still described the US economy as strong despite the more mixed incoming data, suggesting that he still believes the economy has sufficient momentum to absorb further tightening.
European inflation
Tomorrow we will see the release of Euro Area CPI data which will be an essential input into whether the ECB starts the cycle with a 25bp hike, as expected, or opts for a larger hike. Yesterday saw Spanish CPI come in far higher than markets were expecting, rising to 10% versus expectations of 8.7%. By contrast the German CPI figures came in at 8.2%, far below the 8.8% expected by the market. Forecasting inflation at this time is particularly difficult given it takes time for pressures to filter through to the end basket but should a genuine divergence be occurring this makes setting ECB wide policy even trickier.
What does Brooks Macdonald think
As we reach the last day in Q2, it is important to recognise how much the market view has shifted since the first quarter. In Q1 inflation fears grew and central bank rhetoric toughened but there was still significant hope that the Fed, and other central banks, could engineer a soft landing with interest rates cooling excess pandemic demand but avoiding a recession. In that context value equities strongly outperformed growth equities and the rotation created huge volatility within equity markets. Q2 saw less of a rotation, with investors now questioning the ability to avoid a recession and equities selling off in a more uniform fashion. The key question over the coming quarter will be whether the Fed, in particular, starts to take the poorer incoming data into account when setting policy.
Bloomberg as at 30/06/2022. TR denotes Net Total Return
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Cyran Dorman
30/06/2022