J.C. Ureta (Renta 4) | A first argument would be that there has also been some good news. China has relaxed its anti-virus restrictions and seems determined to abandon the “zero Covid” policy. In addition, China’s forward PMIs, although still below 50, have improved markedly and could be back above 50 in June. It seems the Chinese government is once again concerned about growth and has understood the zero tolerance target is not compatible with the goal of 5.5% growth this year. Perhaps this is why the Shanghai Composite has risen 2% this week and is up 6.5% in the last four weeks.
Another piece of good news is that Saudi Arabia has shown its willingness to increase oil production to make up for Russian supply and this alignment of OPEC with the West, if confirmed, could be decisive in controlling oil prices.
But in our opinion, there is a third factor which is that investors think the Fed will value growth more than inflation when the moment of truth arrives, when it has to choose one or the other. In other words, it is clear that the era of unlimited cheap money, of “whatever it takes” and the total monetary party is over. However, it is not at all clear that the Central Banks can stop helping the economy if at some point a recession approaches. It is true the official discourse is that the Fed will take quantitative tightening (QT) as far as necessary, as Fed vice-president Lael Brainard repeated a few days ago. But what is perceived is that it has taken a long time to return to a certain degree of normality and that no one wants to put growth at risk.
This would explain why on Thursday, when the ADP private employment survey for May in the US came out worse than expected (128,000 new payrolls against 300,000 expected) the stock markets rose, with the Nasdaq leading the way. Meanwhile, on Friday, after the publication of a US employment report for May, with more job creation than expected, the stock markets fell, with the Nasdaq this time leading the declines. The idea is that investors interpreted on Thursday that the Fed might ease QT on the back of poor employment data, but on Friday, in the face of good employment data, they thought just the opposite.
Our reading is that stock markets are once again looking, above all, to the Fed and interest rates. And that is why they have been affected this week by the rise in interest rates both in Europe, with the German bund already at 1.26% and the Spanish ten-year bond at 2.43%, and in the United States, where the T-bond interest rate is again close to 3%. The fact is that this impact has been cushioned by the expectation that the rate hike will stop if the economy starts to do badly.
Ahead of the Fed meeting on the 15th of this month, the main news this week is US inflation for May, which will be released on Friday and will give us clues as to what the Fed may do the following week.
Stock markets seem to be trapped in a sideways band. On the one hand there is a ceiling to the rallies given the huge uncertainties about future growth and given the persistent high inflation. But on the other hand, there is also a floor to the declines on the expectation that, if necessary, the Fed will not withhold its help and will ease monetary conditions again. In our view, there is still some downward adjustment, but such a possible adjustment is not incompatible with sideways movements over the next few weeks.
