Summer time and the living is easy, we hope

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Inflation data in line with expectations, in the form of the monthly Producer and Consumer price indexes, along with Industrial and manufacturing data that continues to suggest a cooling of the US economy, helped the leading US indexes climb to new highs. Having started the year with the expectation we would get six rate cuts, gone to none, and then possibly to a hike, there is now renewed hope that a couple of cuts may be possible before the year-end. Reflecting the improved sentiment towards the direction of monetary policy, in less than a few weeks, the two-year US treasury yield has fallen from above 5% to below 4.8%. This week’s inflation data has given rise to hopes that the Personal Consumption and Expenditure index, the Fed’s favoured measure of inflation (if only I had a pound for every time that phrase is used), will fall, breaking that run of hotter than expected reports over the previous months. April’s 5% correction is now a mere blot on the landscape. Later today, we get the monthly Conference Board Leading Economic Index, which is an economic leading indicator intended to forecast future economic activity. It has been on a downtrend as rates have been rising, but on this occasion has failed to be a reliable lead indicator.

As Putin and Xi Jinping enjoy budding up to one another, China’s economy, which many had written off at the start of the year, is starting to show signs of life as industrial production rose by 6.7% year over year in April, ahead of expectations. Activity in mining, manufacturing and utilities accelerated as stimulus measures seemed to be having an effect. The Shanghai Composite has enjoyed a strong run over the past few months, in common with much of the rest of the world.

Most of the garden looks rosy at present. Stocks are rising, oil prices are falling, geopolitical tensions are not increasing, if not easing, and interest rates have peaked, in theory. Money is piling into stocks once again. The AAII investor sentiment index indicates retail investors are becoming more confident for the months ahead.

It feels that any changes to interest rate sentiment will likely drive stocks in the coming months.  If inflation rates remain stubbornly above Central Banks’ targets and the Fed turn more hawkish again, yields will most likely rise again, and stocks will come under pressure.