Edmond de Rothschild AM Market Flash: The situation should be brighter in June

• Following Fed Governor Christopher Waller's statement that there was no rush to cut rates, investors remain uncertain whether the US rate cutting cycle will begin in June.
• The current situation should help inflation to recede and support a soft landing and an ECB rate cut in June.
• Equity markets have performed very well since the end of October, so we believe that the time has come for tactical profit taking.

Following Fed Governor Christopher Waller's statement that there was no rush to cut rates, investors remain uncertain about whether the US rate cutting cycle will begin in June. It is true that recent economic data, particularly indicators of economic surprise in various geographies, could encourage central banks to wait a little longer. It is quite unusual to see a simultaneous economic rebound in advanced and emerging economies prior to a rate cut cycle but it is also true that the disinflation process has slowed down since the beginning of the year, enough to fuel doubts that inflation will tend to come down to central banks' targets.

We believe that the battery of growth and inflation data through June should confirm the slowdown in price inflation, in the US and Europe. Meanwhile, 6-month PCE inflation in the US should trend towards 2%, or even much lower, and allow the Fed to feel more comfortable in cutting rates. In France, as in the rest of Europe, companies tend to grant more modest wage increases given the possibility of a slowdown in wage inflation, a sine qua non for the ECB. The Bank of France expects wage increases to be lower this year, which would suggest a slowdown in the wage/price spiral. This should help inflation to recede and add support to the soft landing and an ECB rate cut in June.

Equity markets have performed very well since the end of October, so we believe the time has come for tactical profit taking. The situation is ripe for market consolidation; equity risk premia leave no room for disappointment in the face of consensus expectations of a miraculous disinflation. In the short term, end-of-quarter portfolio adjustments will lead to profit-taking and a shift towards fixed income. At the same time, the implied correlation with the S&P 500 is now at its lowest level in 10 years. In our view, fixed income markets now offer a more attractive risk/return profile. In particular, we have strengthened our duration in the US.

European Markets

European central banks are becoming more accommodative on monetary policy. The ECB's chief economist, Philip Lane, was convinced that wage growth would return to normal and bring inflation to 2% by 2025, which would allow rates to be cut. For its part, the Swedish central bank kept rates unchanged, but said there was a 50% chance of a cut in May.

However, the fight against inflation is not over yet. For example, the Dutch post office PostNL agreed to union demands for a +19% wage increase. In the UK, Kingfisher (a chain of DIY shops) recorded a sharp fall in annual profits due to cost inflation and its difficulty in passing them on to consumers, as demand remains weak. In the semiconductor sector, Soitec was much more cautious than expected for 2025 and the chairman of the board of directors decided not to seek renewal of his mandate.
On the positive side, Sweden's H&M (ready-to-wear) outperformed expectations and was optimistic about demand recovery, while Trigano (motorhomes) recorded a +16% sales increase despite unfavourable comparisons. Management added that demand remained strong.

US Market

In a week shaped by the Easter holidays, markets remained bullish amid sector rotation. The S&P 500 was up +0.5% and the Russell 1000 Value was up +1.5%. Unlike previous quarters, the rally affected a wider range of stocks, rather than being limited to situational plays. This trend benefited value sectors such as financials and building materials.

However, it has been an eventful few days for social media. Reddit's IPO was a huge success and shares soared before stabilising. The same happened to Truth Social, Donald Trump's social network, which debuted on Wall Street after 20 months as a SPAC. This IPO could help Trump face a hefty fine before continuing his presidential campaign. Astera Labs (data centre and connectivity infrastructure), which has Nvidia and Amazon as customers, also went public.

Problems continued in the aviation sector. United Airlines lost ground after the Wall Street Journal said Federal Aviation Administration (FAA) officials were concerned about safety issues and had stepped up scrutiny of the airline. In addition, Boeing's CEO resigned in the wake of the recent mishaps, leading to a stock rally.

Furthermore, steel manufacturer Cleveland Cliffs announced that they have been chosen to participate in negotiations for public funding of up to $575 million and assured that the proceeds would be used for two separate decarbonisation investments.

Meanwhile, Beijing announced a ban on chips made by Intel and AMD for laptops sold in China. Investors ignored the news even though the ban could reduce the earnings per share of both companies by 5-10%.