MACRO ENVIRONMENT
The month of April saw a slowdown in the US economy with several key economic data points missing expectations. Economic activity in the services sector contracted for the first time since December 2022 bringing an end to the 15 consecutive months of growth as the Services Purchasing Manager’s Index (PMI) which is an economic index that tracks variables such as sales, employment, inventory and prices came in at 49.4 vs expectations of 51.4. Non-farm payrolls increased by 175.000 for the month, less than the 240.000 economists estimate and unemployment saw a slight uptick from 3.8% to 3.9%. Average hourly earnings rose by less than expected at 0.2% vs the 0.3% with the year-on-year annual rate of increase falling from 4.1% to 3.9%. Consumer confidence fell further in the month reaching its lowest level since July 2022 as consumers became more pessimistic about the state of the labour market, more concerned about future business conditions, job availability, and income. Equally less flattering was inflation which rose to 3.5% in March the highest since September of last year. In the April FOMC (Federal Open Market Committee) meeting, the Federal Reserve kept interest rates fixed at 5.25%-5.5% and the Federal Reserve Chair Jerome Powell ruled out any increases in interest rates.
In contrast, inflation in the UK has continued its downward trajectory falling to 3.2% year on year from 3.4% the previous month. UK markets were supported in April as the performance profile broadened away from the technology sector into the financial, commodity and mining sectors which form a greater portion of the UK market. UK business activity also rose more than expected, the S&P Global flash UK composite rose to 54.1 in April from 52.8 in March marking the sixth consecutive month of positive performance. The growth in private sector business activity is the fastest since April 2023.
In the Eurozone, inflation remained flat over the month at 2.4% year on year with the key services component falling 0.30% to 3.7%. Business activity in the region expanded at the fastest pace this year with the service sector more than compensating for the downturn in the manufacturing sector. Eurozone’s composite PMI rose to 51.4 in April up from the recessionary levels of 47.6 in December.
In Japan, the rate of inflation fell slightly to 2.7% in March from February’s 3 month peak of 2.8%. The Bank of Japan did not take any action with respect to policy tightening keeping short term rates between 0%-0.1% in its April meeting.
EQUITIES
April proved to be a rough month for US equity markets, marking the end of five consecutive months of positive performance as the pressure of increasing bond yields took its toll. Major indices, including the S&P 500, Nasdaq and Dow Jones Industrial, all experienced declines of -4.1%, -4.5% and -4.9% respectively. Within sectors, Utilities was the only bright spot, with a modest uptick of +1.7%, while all the other sectors posted losses. Real Estate fared the worst, plummeting -8.5%, followed by Health Care down -5% and Technology down -5.8%
In contrast, Europe and UK markets outperformed their US counterparts, with the MSCI UK was up +2.8% and MCSI Europe ex-UK slightly down -1.5% for the month.
Japanese markets entered corrective territory, relinquishing some of the gains accumulated from earlier in the year. This led to a -4.9% decline in the Nikkei index for the month, although it remained in positive territory for the year, boasting a gain of +5.6%.
FIXED INCOME
Fixed income markets reacted adversely to the shift in rate cute expectations, as they adjusted to accommodate the “higher for longer” narrative. The 10-year US treasury yield surged to its highest level since the latter half of 2023, climbing 0.47% to 4.7% while the 2-year rose 0.40% to 5%. As a result, The Bloomberg US Aggregate bond index closed the month down -2.5%.
COMMODITIES & CURRENCIES
Another stellar month for gold, as it surged to all-time highs during the month ending at $2,307 per ounce. Despite a partial pullback towards the end of the month, major indices such as the Philadelphia Gold and Silver Index and NYSE Arca Gold BUGS Index posted positive returns of 2.5% and 2.2% respectively. The key drivers behind this continued support remain Chinese investors, who are increasingly turning to the precious metal amid uncertainties in Chinese real estate and stock market, along with central banks seeking to diversify reserves and lessen their reliance on the US dollar.
In the energy sector, natural gas saw a slight climb in price by month end, while crude oil remained unchanged despite escalating tensions in the middle east.
GBP/USD remained largely unchanged for the month ending at 1.25 vs 1.26 at the start of the month.
OUTLOOK
Our base case scenario still leans towards a soft landing but should not be taken for granted. The disinflationary process is underway in the US with the journey proving to be turbulent and growth decelerating to below trend levels. Policy miscalculation will continue to remain a threat, but the Federal Reserve (Fed) have renewed their policy flexibility and capacity to support both growth and markets. Easy financial conditions have further complicated policy decision making, resulting in a higher for longer interest rate environment. The potential downside risk in equities is diminished, the risk/reward balance in high grade fixed income appears more enticing and therefore maintain an overweight position. This preference is driven by the prevailing macroeconomic and policy landscape, coupled with the safety buffer provided by current valuations.
