UK inflation has fallen back to the Bank of England’s (BOE) 2% inflation target, but markets don’t expect the price data to impact the central bank’s monetary policy decision due on Thursday. The Swiss National Bank (SNB) also announces its latest monetary policy decision on Thursday, its first since surprising markets with a rate cut in March. Markets in the US were closed on Wednesday for a public holiday.
The Consumer Price Index in the UK fell to 2% in May, down from April’s 2.3% increase in consumer prices. Services inflation - which is closely watched by the BOE - came in at 5.7% in May, hotter than market expectations. While headline inflation has returned to the BOE's 2% target for the first time in almost three years, it is likely to be too late to change the outcome of the central bank’s monetary policy decision, which is set to be published Thursday afternoon. A majority of economists don’t expect the BOE to diverge from its 16-year high of 5.25% Bank Rate on Thursday or at its August meeting, but expectations are much higher for a first cut in September or November. Factors such as high services inflation and stubbornly high wage growth - which came in at 5.8% in the three months ending in April - are expected to prevent the BOE from beginning its easing cycle too quickly.
Also on Thursday, the SNB is due to deliver its first monetary policy announcement since surprising markets with a rate cut in March, the first among the world’s major central banks. While a clear consensus has been built ahead of the BOE decision, the SNB is known to be much more difficult to read. Recently, Swiss inflation held a 1.4% increase from last year in May - its fastest pace so far this year. As recently as May, a large majority of 80% of market participants expected the SNB to cut, but the most recent surveys have shown a slight majority forecasting a hold.
The People’s Bank of China kept its one-year loan prime rate, which is used for corporate and household loans, unchanged at 3.45%. It also left the five-year loan prime rate, which is used as a peg for property loans, untouched at 3.95%. Hong Kong's Hang Seng Index and the CSI 300 were both trading down about 0.6% on Thursday. In Tokyo, the Nikkei 225 was up 0.3% and in South Korea, the Kospi was trading 0.5% higher. In Australia, the S&P/ASX 200 was roughly flat.
Corporate news in focus: Quarterly figures from Accenture. Annual general meetings at Alstom, Kingfisher.
Economic data in focus: Swiss National Bank (SNB) interest rate decision and Financial Stability Report, Swiss trade balance, German Producer Price Index, Bank of England interest rate decision, US weekly initial jobless claims.
Global economic and market trends at a glance
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Editor: Alessandro Fezzi
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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).
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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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