HIGHLIGHTS
The US consumer price index (CPI) came in higher than expected, leading to lower rate cut expectations. US equity markets were down this week, as the shift in rate expectation kept the markets volatile. 10Y treasury yield moved up further and hit the highest level since November.
Housing Market: As US CPI remains firm and will probably delay the rate cut, treasury yield increased and the correlated 10Y mortgage rates also jumped to nearly 7%. The increase in borrowing costs is going to harm activity in the housing market.
ECB: Markets are expecting that the ECB will cut rates earlier than the Fed. ECB held its interest rates in the meeting this week, while it signaled that the rate cuts could start as soon as June. A total of 4 cuts in 2024 are priced in.
Yen: The Japanese yen dropped against the dollar after the rate move in the US. Japanese officials announced they were ready to take bold measures if needed.
MARKETS
16,175.09 | -0.45% | |
S&P 500 | 5,123.41 | -1.56% |
Dow | 37,983.24 | -2.37% |
10-Year | 4.50% | +12bps |
Brent | 90.21 | -0.79% |
DXY | 106.01 | +1.65% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Goldman Sachs: Given the volatile market, mega-cap tech firms outperformed in Q1 earnings. Investors treat mega-cap tech as a flight to safety amid the increasing geopolitical activity.
Standard Chartered: Equities in energy sector would be a great inflation hedge. Although it carries risks of a near-term pullback, we look to buy more on dips if it happens. We would also use pullbacks to accumulate equities in the US technology and communication sectors as we expect strong Q1 earnings.
Fixed Income
Morgan Stanley: The default rates of leveraged loans and some collateralized loan obligations are increasing. Their default rates are higher than 6%, approaching the levels that are typically associated with recessions. Although systemic contagion from this specific market is not a risk in the short term, it is worth monitoring closely when the rates are going to stay higher for longer.
UBS: The disinflationary trend in non-US countries favors quality bonds. Although the divergence between the US and other countries is increasing, we believe their inflation trend is correlated over the longer time horizon. Investors are suggested to lock in yields before rates drop this year, which 1-10Y duration bonds are highly recommended.
Economy
Morgan Stanley: The rationale for the imminent Fed cut is evaporating, as the unemployment rate remains low and inflation data remains high. We believe the rates will stay higher for longer, which will challenge the current valuation. Investors are suggested to manage their risks actively.
UBS: The current economic condition in the US still allows the Fed to cut rates, but it will take longer than previously expected. Inflation is expected to drop when the shelter component starts to reflect the actual rental market trend. Wage growth is moderating and economic activity is expected to slow further amid the high interest rates environment.
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DISCLOSURE
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