It’s life’s illusions that I recall I really don’t know life at all

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Being away for a few days allows one to reflect on what appears to be happening in the capital markets and where sentiment lies. Last week, the S&P just about held ground despite a strong performance from Nvidia after its results. The major European indexes, including the FTSE 100, underperformed. All the sectors in the S&P 500, bar the tech and communications sectors, finished the week lower. The economic data remains encouraging for the US economy. In the past week, the University of Michigan consumer survey indicated inflation expectations eased relative to the previous estimate amid a pullback in gasoline prices. The updated sentiment index shows a smaller decline in May compared to an earlier estimate. The monthly durable goods orders increased last month. The flash Purchasing Manager Surveys continue to indicate that developed economies’ growth has continued to gain momentum in the 2nd quarter. The May flash US PMI report from S&P Global topped expectations, suggesting firmer growth in business activity this month. What was the consequence of all this good news? US treasury yields rose in the 2nd half of the month. The 2-year treasury, the one we always highlight as being the most sensitive to changes in interest rate sentiment, went from 4.73% back to close to 5% where it started the month. As a result, a strong start to the month for stocks petered out.

So we have this conundrum now: resilient economic data helps support stocks, but then, as we heard from several Fed speakers last week, it once again reduces the chances of a US rate cut. Also, higher bond yields make equities less attractive to own. Last time US treasury yields were close to 5% the S&P 500 was 6% lower. Stronger growth risks and higher prices risk policymakers more cautious on rate cuts. So, what is going to drive stock markets in the coming months? It looks largely at expectations of how the central bankers will react to economic data points, as Powell so often reminds us. The Bank of England is unlikely to act ahead of the General Election now. One can probably rule out a summer cut from the Fed, and again, we are getting closer to an election there. Europe still seems keen to move in June, but could that now be in question?

Today, we get preliminary German inflation data for May alongside consumer confidence; later in the week, we get the same for the eurozone as a whole, where the year-over-year rate is expected to fall again. On Thursday, there is a raft of US economic data, including the second estimate for quarter-on-quarter economic growth, jobless claims, and inflation data in the form of PCE prices, the second estimates quarter on quarter. Retail consumer spending—the list is almost endless. As for the UK, we get some mortgage data on Friday, which will probably be the highlight. Obviously, the focus for the UK will remain on the election as one poll this morning suggests Mr Sunak is closing down the gap on his rival.