Confusing inflation figures

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Inflation continued to abate in many countries in May, creating a problem for the US Federal Reserve (Fed). In the United Kingdom, however, inflation is rising as a result of the decline in sterling. Global financial markets edged down last week.

The Fed also announced last week that it will start shedding the enormous volume of bonds it amassed on its balance sheet during the crisis. Ben Steinebach Ben Steinebach Head of Investment Strategy

Last week the Fed decided to raise the bandwidth of the fed funds rate by 0.25 percentage points to 1%-1.25%. Apparently, lower inflation – which has declined for four consecutive months (from 2.3% to 1.7%) – did not offset the sharp decrease in unemployment. But declining inflationary pressure poses a dilemma for the Fed, as the tight labour market was expected to drive up inflation owing to a rise in wages – and higher inflation would justify the interest rate hike. We do expect inflation to rise in the next eighteen months, and that the Fed will consequently hike interest rates once more this year and three times next year. The Fed also announced last week that it will start shedding the enormous volume of bonds it amassed on its balance sheet during the crisis. This, too, will in principle put upward pressure on interest rates. Downward pressure on inflation is not confined to the US – prices are rising less quickly in the eurozone as well, having topped out at around 2% earlier this year. The latter was largely the result of a low base rate at the beginning of 2016, when oil prices bottomed out. In Germany, inflation came to 1.4% in May, compared with 2.2% in February. The ECB does not have to deal with the dilemma facing its counterpart in the US, as it is not ready to tighten its monetary policy. This is a different story for the Bank of England. Despite moderate wage growth in the United Kingdom, inflation there has risen rapidly from 1.6% at year-end 2016 to 2.9% in May. And so the Bank of England now faces the dilemma of whether it should raise interest rates.

Eurozone economy flourishing

The economic indicators published in the United States last week showed a mixed picture. The eurozone, however, continued to experience an economic upturn. Meanwhile, the Chinese economy is gradually and calmly cooling down. Last week the US announced disappointing retail sales and industrial production figures for May. The financial markets were not too concerned, though, as data for April turned out to be rosier than previously reported. Producer confidence showed a sharp improvement in June, certainly for the Empire State Manufacturing Index, which rose steeply. The comparable Philadelphia Fed index inched down, but is still at a high level. In the eurozone, economic indicators remain exceptionally positive. Industrial production rose by 0.5% in April, on top of the 0.2% gain in March. The labour market and public finance are also rapidly improving thanks to favourable developments. In China, most indicators are pointing to a gradual cooldown, although this is proceeding in a very controlled manner. In May, industrial production rose by 6.5% and investments advanced 8.6%, with the latter rising slightly less steeply than expected. Bond markets barely budged last week: 10-year yields edged down further in the US and, on balance, rose slightly in Europe. Equity markets lost ground as a result of lower inflation and downward pressure on technology shares. The Nasdaq consequently dropped more sharply than other indices in the US did.

AEX loses some ground

The AEX index lost a bit of ground last week. Sentiment was dominated by inflation concerns globally and sales pressure among tech funds. A slight recovery was seen on Friday. Amsterdam’s leading index lost ground last week, giving up just under 1% and trading at around 521 points. The list of laggards was headed by Ahold Delhaize (-5.7%), followed by ArcelorMittal (-5.3%), ASML (-4.1%), and Altice (-3.2%). Ahold’s loss was attributed to a profit warning issued by an American supermarket chain. Arcelor, meanwhile, went along with the sentiment in its sector. At the top of the list of leaders was Gemalto (+4.8%), followed by Vopak (+3.9%), Randstad (+1.8%) and Wolters Kluwer (+1.7%).

There was no corporate news this past week, but there was other news. The Netherlands’ Talpa announced an official counterbid of EUR 6.50 per share for TMG. Despite the higher bid offered by Talpa, this promises to be a rocky ride, as Mediahuis can already count on 60% of the shares. Whereas TMG will probably disappear from the market, the number of free float shares of the insurer a.s.r. increased. The Dutch State sold 25 million shares of a.s.r., reducing its shareholding from 36.8% to 20.1%. Although Akzo is being left alone by PPG for now, activist shareholder Elliott is still a thorn in its side. Elliott increased its stake in Akzo to 5.01%.

Philips Lighting won a LED commission for a large Russian greenhouse. According to Philips, the order was intended for the biggest project to date for growing vegetables in greenhouses using LED lighting. This new technology, which will help feed the growing global population, is set to take off in the coming years.

Outside the Netherlands, Nike announced that it would cut 2% of the workforce in order to reduce costs. General Electric, meanwhile, is saying goodbye to its CEO Jeff Immelt after 16 years of service. John Flannery was presented as the new CEO as from 1 January. The company is referring to this changeover as a ‘natural succession’, but investors had been unhappy with Immelt for some time as GE’s share price is lagging far behind the market. In the US, the competition authorities gave Dow Chemical and DuPont the green light for a merger, removing one of the final obstacles to the deal. IAG, the owner of British Airways (BA), reported that BA’s computer failure last month cost the company around GBP 80 million. BA had to pay thousands of customers compensation, rebook flights and arrange accommodations for customers.

The technology sector has been under pressure since the end of last week, with mainly large tech funds losing ground. At this point, we see this as profit-taking, as these companies’ share prices have risen sharply so far this year. Still, Google is preparing for an anti-trust fine from Brussels, which could potentially come to more than a billion euros. Apple announced cheerier news: CEO Tim Cook officially announced for the first time that the tech giant is working on technology for self-driving cars. Cook called it the mother of all self-learning robot projects (AI, artificial intelligence).

Very little news expected in upcoming week

The week ahead will see results reported by a few companies that have a split financial year, but very little macroeconomic news. American companies in particular report according to a split financial year. Adobe Systems, FedEx and Lennar will announce results on Tuesday, Orale on Wednesday and BlackBerry on Friday. FedEx has had a few rough quarters, but the market expects the company to meet the bottom end of its annual profit forecast range. FedEx is expected to announce prospects for 2018 that are in line with market expectations. The market assumes Oracle will report earnings per share of USD 0.78 for the fourth fiscal quarter. In addition, Oracle’s licences are expected to continue their downward trend in the upcoming quarter as well. The company is growing strongly with its Cloud services, but that is partly due to a takeover.

This coming week, all eyes will be on the second round of the French parliamentary elections. The general expectation is that Macron’s party (En Marche) will take around two-thirds of the seats. Beyond that, figures will be published on construction output in the European Union for April, as will new data on sales of both new-build and existing homes in the US in May. As for confidence indicators, attention will be turned to the first and preliminary figures on sentiment among purchasing managers in many countries in June. The Netherlands and Belgium will publish data on consumer confidence, and Belgium and France will also publish producer confidence data, all for June. And finally, after last week’s movements in consumer prices, it will be interesting to see how producer prices in Germany developed in May.


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