Muzinich Weekly Market Comment: Make hay in May?

May 13, 2024

In our latest round-up of developments in financial markets and economies, we look back at a positive week for risk assets and consider whether the European economy has finally turned a corner.

According to myth, investors “sell in May and go away”, taking profit and avoiding a seasonal dip in financial markets. Or so the theory goes. Clearly, investors didn’t get the memo if the early part of the month is anything to go by.

Last week was a solid one for risk takers. Government bond curves bull flattened, with yields at the long end of the curve falling more than at the front end, and spreads tightened in corporate credit markets, particularly in emerging market high yield and US investment grade. Meanwhile, commodities drifted higher and major equity indices in the US, Europe and Asia were mostly up.

Swedes cut loose

The Swedish central bank, the Riksbank, met market expectations by lowering its policy rate by 25 basis points to 3.75%, the first cut since 2016. Sweden becomes the second G10 central bank to loosen monetary policy this year, the Swiss National Bank being the first to do so in March.

The Reserve Bank of Australia left rates unchanged at 4.35% and seems in no rush to move anytime soon. The Australian futures market indicates interest rates will remain on hold until the summer of 2025, and implies the long-term neutral policy rate —the real interest rate (net of inflation) that supports full employment while keeping inflation constant — should be 3.89%.

Bank of England edging closer

The main event for the week as far as monetary policy is concerned was the Bank of England (BoE) meeting on May 9. Although policy rates were left unchanged for the sixth successive meeting at 5.25%, the BoE’s Monetary Policy Committee is edging closer to cutting, with a second member of the committee voting for an immediate reduction in rates. The other seven members voted for no adjustment.

Speaking to reporters after the meeting, BoE governor Andrew Bailey said: “It’s likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates.”¹

The overnight interest rate swap market is currently pricing in a 64% likelihood of policy loosening starting in June and for long-term neutral rates to be set at 3.55%.²

On the economic front, the BoE upgraded its 2024 GDP outlook for the UK from 0.2% to 0.5% and from 0.75% to 1% in 2025.  Following the BoE meeting, the Office for National Statistics released first quarter GDP data for the UK, which exceeded expectations. The economy grew at its fastest quarterly pace since 2021, increasing 0.6% quarter-on-quarter.³  All subcomponents of growth rose, with net trade the largest contributor, while domestic demand rose 0.2%, a positive result following two consecutive quarters of contraction.

Europe: On the up?

In a week that was data light — in stark contrast to the previous week as we highlighted in our last Market Comment — the other noteworthy development was the final release of the composite Eurozone Purchasing Managers’ Index, which was further revised higher to 51.7 from 51.4.

This moved the index above its US equivalent for the first time in 12 months,⁴ and offered another example of European data surprising on the upside in recent weeks. The region is benefitting from the pickup in global manufacturing activity and rising real incomes as inflationary pressures continue to abate.

In contrast, the US economy may be heading in the opposite direction, with recent data falling short of projections. The Citigroup US Economic Surprise Index — a measure of how economic data compares with consensus analyst forecasts — has turned negative (see Chart of the week). This begs the question: are restrictive monetary policy, the tapering of fiscal support and dwindling consumer savings finally taking effect?

Chart of the week: Have economists been too optimistic on US?

Source: MacroMicro, as of May 10, 2024, Citi Economic Surprise Index – US. For illustrative purposes only.

References

1.Bloomberg, ‘Bailey signals BOE may cuts rates more quickly than expected’, as of May 9, 2024
2.Bloomberg, as of May 10, 2024
3.Office for National Statistics, as of May 10, 2024
4.S&P Global, ‘Eurozone S&P Global Composite Purchasing Managers Index’, as of May 6, 2024

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of May 2024, and may change without notice. All data figures are from Bloomberg, as of May 10, 2024, unless otherwise stated.

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