US inflation fell slightly in April, bringing some relief to equity markets mid-week. As a result, the implied probability that the Federal Reserve will start cutting interest rates in September increased in futures markets.
In the United States, consumer prices continued to rise sharply in April, but not quite at the same pace as in the previous month. The current inflation rate is 3.4%, down from 3.5% in March. On a monthly basis, consumer prices rose by 0.3%, which was also somewhat more moderate than expected. The core inflation rate, which excludes energy and food prices, fell to 3.6% in April from 3.8% in the previous month. All in all, the latest inflation data do not seem to have significantly changed the outlook for the first interest rate cut by the Federal Reserve. The Federal Reserve has maintained a tight monetary policy for some time in the face of stubborn inflation, and Federal Reserve Chairman Jerome Powell recently expressed renewed caution about easing monetary policy.
On Wall Street, the Dow Jones Industrial closed up 0.9% at 39,908.00 points, after hitting a record high of 39,935.00 in late trading. The broader S&P 500 was up 1.2% at 5308.15, and the Nasdaq 100, which also hit a high, ended the day up 1.5% at 18,596.65 points.
Yesterday's retail sales data provided a glimpse into the US economy, and in particular the all-important consumer spending. According to the Commerce Department, retail sales were unchanged month-on-month in April, well below economists' consensus forecast of a 0.4% rise. Moreover, the 0.6% rise in sales in March was lower than the 0.7% initially reported. The latest analysis of the New York Fed's monthly survey of regional industrial sentiment was also negative. The resulting Empire State index fell by 1.3 points to minus 15.6 points in May. On average, analysts had expected an improvement to minus 10 points. Below zero, the indicator signals a decline in economic activity.
In Asia, stock markets saw an upward trend. In Tokyo, the Nikkei 225 was up 1.3% and in South Korea the Kospi was up 0.8% after a public holiday. Hong Kong's Hang Seng Index also reopened after a public holiday and rose by 1.9%, while the Shanghai Composite gained 0.5%. In Australia, the S&P/ASX 200 was up 1.7%.
The German government's Council of Economic Experts, the so-called "Wise Men", lowered their economic forecast for this year. They still expect gross domestic product to grow by 0.2% this year. Last autumn they were still forecasting growth of 0.7%. This is due to weak macroeconomic demand. The German government is also forecasting only moderate GDP growth of 0.3% this year. At the same time, the "economic experts" expect an average inflation rate of 2.4% this year and 2.1% in 2025.
Corporate news in focus: Swiss Re, Siemens, Deutsche Telekom, Wienerberger, Easyjet, BT Group, Applied Materials and Walmart.
Economic data in focus: Italy consumer prices, USA import and export prices, Philly Fed industrial indicator, initial jobless claims, housing starts and permits and industrial production.
Global economic and market trends at a glance
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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.
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Unless otherwise stated or specified, the rates used in the analysis are normally the share prices provided by the news agencies Reuters and/or Bloomberg at the close of the stock exchange of the domestic market of the analyzed security or the relevant principal market of this security on the respective local stock exchange on the eve of the day of compilation.
Explanation of investment recommendations for stocks
We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).
Reference regarding share valuation basis: The analysis compiled by LGT Bank (Switzerland) Ltd. are essentially based on secondary research relating to fundamental and quantitative analysis. Generally accepted valuation methods (valuation multiples, return figures, sector comparisons, comparisons with past valuations etc.) are used for this. The forecasts for the quantitative analysis are prepared with the help of mathematical-statistical procedures (see statements above concerning the analysis tool “theScreener”). Economic indicators such as interest rates, currencies, commodity prices and assumptions relating to the economy are included in the overall assessment. The mood of the market also affects the company valuation. Moreover, many of the approaches are based on estimates and expectations that may change quickly and without warning, depending on developments specific to the industry. Therefore, the recommendations derived from the analysis can also change accordingly. The investment judgements generally refer to a period of 6 to 12 months. However, they are also subject to market conditions and represent a snapshot of the situation. They may be achieved more quickly or more slowly or be revised upwards or downwards.
Explanation of investment recommendations for bonds
We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.
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Definition of rating categories of S&P and Moody’s which are relevant for us:
AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates
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Country-specific information
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