La Française: Decrease of upward revisions US, acceleration of growth Europe

13 juni 2024

By François Rimeu, La Française Asset Management Strategist

Markets bounced back in May after a slightly difficult month in April for risky assets, with an unchanged observation: the climate is much more favorable when US interest rates are on decline, as was the case last month.

American inflation, for once, met expectations, helping to calm the bond markets, which were especially reassured by relatively negative news from the U.S economy. Indeed, the vast majority of the figures disappointed with retail sales not progressing, significant drops in ISM figures and deteriorating confidence indices (Conference Board, University of Michigan). As mentioned previously, we are probably at the end of upward revisions concerning U.S growth.

However, does this mean a recession is imminent? The answer is a clear no in our eyes, due to a still tight labor market (even if it is less so), of a wealth effect sustaining consumption, and a still very accommodating fiscal policy. This policy continues to generate significant issuances, some of which have been moderately received by investors as was the case in recent weeks. Once again, we are not really worried, as technical factors remain within historical bounds.

Equity markets were also supported by generally encouraging corporate results on both sides of the Atlantic. Nvidia, in particular, was once again the driving force behind the American markets: as of June 5, the S&P 500 was up 9.57%, with half of this increase attributable to Nvidia alone. More broadly, for the first time since the beginning of the year, we are witnessing upward revisions regarding European earnings in 2024.

In the eurozone, good news continue with confirmation of accelerating growth. PMI, ZEW, and IFO indicate a quarterly growth rate of around 0.3%-0.4%, which is much better than the zero growth recorded in 2022. Upward revisions should thus continue, as was the case for the ECB during its last press conference, which generally supports equity markets and credit spreads. It should also be noted that the good news are not confined to the eurozone, as most major economies are currently seeing their growth accelerate.

Central bankers, for their part, have generally delivered rather accommodative speeches, with rate cuts in Canada, the eurozone, and Sweden. Beyond the rate cuts, the ECB also appeared reassured by the latest wage inflation data received in the first quarter and lowered its wage increase forecasts.

The drop in oil prices seems to be a supportive factor for the market in the short term

The OPEC meeting resulted in maintaining the oil production cuts, as expected by the markets. Beyond this decision, investors were reassured by the possibility of these production cuts decreasing in the fall. Coupled with disappointing U.S. growth figures, this meeting had a significant impact on crude oil, which has dropped by 8% since the end of April. Again, this decline seems to be more of a support factor for growth and the markets in the coming weeks. There is a strong correlation between the price of a barrel of oil and 10-year U.S. bonds.

Therefore, the dynamics in place since the beginning of the year do not seem to need reconsideration: the inflation risk is perceived as low in the medium term, which allows the long end of the curve to remain fairly calm, with volatility trending downwards. This relative calm in the bond markets allows all risky assets to continue their rebound. However, we still believe that the inflation risk is undervalued, especially in the United States, which is why we maintain positions on inflation breakeven points to hedge portfolios that are still well-invested.

June / July Outlook

The European elections have just delivered their verdict, likely leading to a period of increased nervousness until the French elections. However, this does not change our rather constructive medium-term outlook, due to improving growth prospects and central banks gradually starting to lower their key interest rates.