Lower US Inflation Print Softens Policy Expectations - Zurich Life Weekly Investment News

Good morning,

The latest US figures last week show that the disinflation trend remains intact, a deeper dive into the figures is contained below. However, there is always the shadow of respective risks looming over investment markets. Two key topics currently are market breadth and the US debt ceiling. We’ll no doubt have the opportunity to discuss the second point as negotiations ramp up as we approach the limit, forecast to potentially be in the next month.

In relation to market breadth, we have discussed this at numerous junctures in recent years. The headline stats are certainly material and not without concern:

·        In the US, the top ten stocks are responsible for 70% of returns so far this year

·        Apple now has a bigger market cap than the whole Russell 2000 index

·        Apple and Microsoft alone are now almost 15% of the S&P 500.

However, it is worth noting that concentration has always existed. We have been applying our active top-down investment process to multi-asset funds since the 1980s. We have witnessed the trends and narratives of peak oil, the rise of Japan, the dot com bubble, and the emergence of China. Capitalising on these trends through strategic allocations, whilst allowing for tactical flexibility are core tenets to our approach at Zurich. Further information on our philosophy, process, and people is available here

As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.

Weekly Investment News

Last week saw choppy trading in the US as investor sentiment was uncertain over the economic outlook. On Wednesday the Bureau of Labor Statistics released their April inflation print which came in at a figure of 4.9%, below economists’ expectations of a steady 5.0% rise. The market took this news positively, viewing the lower inflation print as evidence towards softer monetary policy and an end to interest rate rises from the Fed. Growth and tech stocks rallied as a result, with the tech-heavy Nasdaq closing at its highest level since June of 2022.

Unfortunately, optimism was short lived as regional banks again showed signs of strain. On Thursday, California-based lender PacWest saw shares dive by 23% after announcing that deposits had fallen by 9.5% the previous week. Trading in this area remains volatile and regulators are now struggling to put a lid on a potential ‘doom-loop’.

Throughout the week, investors were also keen to see a resolution in the current debt ceiling impasse. US Treasury secretary Janet Yellen has urged lawmakers in Washington to come to an agreement sooner rather than later, warning that if the debt ceiling is not raised, the US government could begin to run out of cash as early as June. Former President Donald Trump also chimed in, in what is perhaps analogous of the situation, encouraging Republicans to allow the government to default unless Democrats agree to large spending cuts.

In Europe, poorer sentiment was felt, however some positive earnings for luxury goods manufacturers saw European equities rally on Friday. European investors in US securities saw a substantial benefit to a decrease in dollar strength against the euro, with US equities up 1.1% in euro terms despite losses for local investors. In Asia, weaker Chinese inflation data pointed to weaker demand in spite of expectations. The Chinese CPI figure for April came in at 0.1% versus expectations of a 0.4% increase. Chinese growth has been a strong driver of European markets in 2023 and it remains to be seen how robust its economic forecasts will be.


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