Disappointing US retail sales, soft job creation numbers with the unemployment rate getting back up to 3.9% and, – most importantly - inflation finally receding somewhat after a few months of an upward trend in the first quarter, have convinced investors that interest rate cuts are back in play.
Currently, markets are pricing in two 0.25% interest rate cuts this year, starting in September. While this is a long way away from the 6-7 cuts investors were anticipating at the beginning of the year, it’s worth noting that this radical change in expectations did not come with a repricing in stock markets, quite the contrary. Boosted by the magnificent 7, American markets have had a good run over the past few months. And most of the world followed.
One of the best performances came from China with a double-digit increase. The incentives keep on coming and local governments will be purchasing unfinished residential real estate projects, completing the works, and then putting them back on the market at subsidized prices. Households who purchase such new developments will also be offered a premium on the price of their existing home, which will then be transformed into social housing.
Investors have been taking these new measures as a sign that Beijing is finally taking the problems in its real estate market seriously. That, combined with stock purchases by the country’s massive sovereign fund (which has at the same time been selling its USD holdings and buying gold) has boosted Chinese stocks.
Bond markets have seen few large movements. Yields have fallen in the US, Canada and a number of other geographies (meaning higher bond prices), but these have been countered by falling currencies (weighed down by lower interest rate differentials). In the end, EUR and USD bonds have remained flat.
The biggest loser has been Japan. In the absence of any real support for the yen, the Japanese currency has lost around 3% over the past month, leading to a loss on Japanese bonds. Although interest rates are rising in Japan (the 10-year has recently reached 1%), differentials versus the rest of the world remain wide and the yen is still under pressure.
All in all, always privilege a long-term strategy for your savings.