Weekly View - Yellen’s blunder
Markets were directed by mixed messages last week. On Tuesday, US Treasury secretary and former Federal Reserve chair Janet Yellen claimed that interest rates may have to rise, despite her current role having no bearing on monetary policy making. A sell-off in markets ensued, particularly within highly valued sectors. Yellen later backtracked on her comments, encouraging a recovery in markets. The Bank of England took the decision to reduce its pace of bond purchases on the back of a strong domestic economy. In the same direction, a European Central Bank Governing Council member said its emergency bond purchases could also be scaled back as early as June. And to seal off the week, Friday’s weaker-than-expected jobs report reinforced the Federal Reserve’s dovish stance. Long-term interest rates declined as did the US dollar, and the S&P 500 touched a new high. All of these events drove an increase in short-term market volatility. We have become somewhat more cautious on equities' short-term prospects.
While US companies are struggling to fill jobs, it appears that many workers may prefer to stay home and collect generous unemployment allowances. Because this reflects more of a jobs demand than a jobs supply problem, firms may have to raise wages, eventually leading to higher inflation. In anticipation of this, the inflation breakeven rate broke above 2.5%, its highest level since 2013. We remain underweight sovereign bonds.
At last week’s G7 meeting world leaders reinforced their coordinated pressure on China, making US-Chinese tensions unlikely to abate. Despite this backdrop, Chinese trade statistics reveal that the world economy remains very strong. Chinese exports and imports rose by 32% and 43% year-over-year, respectively in April. This strength in global demand was further confirmed by strong German manufacturing orders. Commodity prices further echo healthy economic indicators, with industrial metals, and more specifically copper, prices reaching new highs. We are now seeing a confluence of low inventories and long delivery times that has no precedent in last 25 years. At the same time, the US economy is reopening, with the most foot traffic in US airports last Thursday since 2020. Q1 earnings were good throughout the reporting season. Blended earnings growth for the S&P 500 is now 49%, up from 24% at the start of the year. We favour companies with strong pricing power and have a generally diversified approach to equities.