And the beat goes on
Stock markets cheered the news that Jerome Powell all but confirmed that they will most likely probably cut interest rates this year, starting in June and twice more before the end of the year. The higher beta names getting a particualr boost. The S&P 500 hit a new high for the 19th time this year as the index continues to sail on above many strategists’ targets for the year-end. Andrew Bailey, after yesterday’s Bank of England meeting, likewise left rates unchanged, dangling the expectation that UK interest rates will start to come down in the coming months. Of the nine members of the MPC, eight voted to leave rates where they were this month, and one voted to cut. The common theme from both meetings was that inflation was trending down, although Powell referred to the recent inflation reports that came in slightly ahead of expectations as bumps, that the stance of monetary policy would remain restrictive even if rates were to be lowered as they were starting from a restrictive level. So that was that, then. Equity markets are becoming more convinced of the soft landing scenario supported by a less restrictive monetary stance from the central banks.
Despite all the moaning and groaning, there appear to be definite signs the UK economy is on the up as the S&P global flash PMI reported economic activity was growing for the 5th month in a row. According to the latest Rightmove survey, house prices have risen year over year. Of the G7 countries sterling is the strongest performing against the US dollar. UK consumers are at the most upbeat about their personal finances since 2021, suggesting household budgets remain resilient after the economy’s brief recession last year, according to the latest Gfk report. Retail sales uptrend continued according to today’s release which came in better than expected. Normally, signs of an improving economy assist a government coming into an election year, but so far, the polls indicate Mr Sunak’s popularity and that of the Conservative party remain pretty low.
What can one say? The sentiment is becoming ever more optimistic and bullish, and fund managers are becoming more risk-tolerant. Apparently, the tech sector trades now on 29x earnings as AI drives valuations higher. Dividing opinions about whether we are in the next tech bubble. Not even two analysts from the same bank, Merrill Lynch, can agree. One says yes for good reason, and the other says no for equally good reasons.