Weekly house view | Whatever it cakes

US President Joe Biden and House Speaker Kevin McCarthy have reached an agreement on the debt ceiling but there is still work to do for McCarthy, who must now sell it to lawmakers in his Republican Party, some of whom think he has made too many concessions. A crunch vote is expected this week. Time is short as the Department of the Treasury has indicated the so-called X-date – when the government runs out of money – will be next Monday, 5 June. Also on the political front, Republican Ron DeSantis launched his 2024 presidential campaign and Hillary Clinton said Biden’s age “is an issue” for the election. The Federal Reserve may not be done yet as its preferred inflation gauge (core PCE) rose at a monthly rate of 0.4% in April and 4.7% on the year. Consumer spending adjusted for inflation rose by 0.5% in April, well above the 0.3% consensus number. Thus, the Fed may have to hike rates one more time. The dollar strengthened on the week on those firmer numbers. We continue to expect no rate easing before 2024.

Purchasing manager indices (PMIs) confirm that the euro zone is flying on one engine only: services. German manufacturing looks especially weak as the latest negative GDP data confirmed that the country slipped into recession in Q1. Government spending was a big negative as Covid-related spending was slashed. For the European Central Bank (ECB), the battle continues as a boom in services and a fall in unemployment push wages higher. Of note also are indications from the airline sector that the era of ultra-cheap tickets is over. Celebrating the ECB’s 25th birthday, President Christine Lagarde tweeted a picture of herself cutting a cake with the caption “Whatever it cakes!” – a reference to former president Mario Draghi’s 2012 pledge to do “whatever it takes” to preserve the euro. 

In China, industrial profits slumped an annual 18% in April on weak upstream earnings growth as commodity prices like coal and chemicals remain feeble. Although China’s recovery is quite uneven, we are sticking to our 5.5% Chinese GDP growth forecast for 2023. In markets, stronger US consumption numbers pushed 10-year US Treasury yields to 3.8% last week. The recent rebound in Treasury yields has not prevented the S&P500 from rising on AI-related companies’ earnings beats, which have pushed up all related companies. Tech stocks’ share of the S&P500’s capitalisation is now above its 2000-2001 level. Indeed, market concentration has reached historical levels, with the top two weights representing an all-time high of 14% of S&P 500’s capitalization and the top 10 29%: Ex-the top seven names, the S&P 500’s performance is flat this year.