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Lloyd Adams, of Team Asset Management, offers this week’s review of the markets
Your key sound bite for this week is that US interest rates are unlikely to move before the end of the summer, as the American jobs market remains strong, wages continue to rise and core inflation measures are stubbornly refusing to buckle. Here’s what it means, and why it matters, as well as some interesting business moves at some of the world’s largest companies.
The April US jobs market report tells us that the unemployment rate remained steady at 3.8%, with significant employment growth in the healthcare (240,000 jobs added during the month) and leisure and hospitality sectors (89,000 jobs added during the month).
So far this year, worker pay has risen more than anticipated. The US employment cost index, which tracks employee wages and benefits, grew 1.2% in the first quarter, according to the Labor Department. That was higher than 0.9% in the fourth quarter of 2023 and above the Dow Jones consensus forecast for a 1% rise.
By the end of 2025, inflation is expected to return to targets of around 2% in most major economies. According to the Organisation for Economic Co-operation and Development, headline inflation among its 38 member nations is expected to dip to a 5% aggregate level in 2024 from 6.9% in 2023, and then fall further to 3.4% in 2025.
The lingering effects of high interest rates and inflation continue to weigh on a UK economy that has “sluggish” growth prospects. The same OECD forecasts have put the country on course to be the worst-performing economy of all advanced nations next year. The UK is forecast to expand by 1% in 2025, which is behind Canada, France, Germany, Japan and the US.
Economists have been predicting for a while that consumers would reduce their spending in response to inflation and higher borrowing costs. We are seeing the first signs of this hitting the pockets of the largest fast-food chains, who have reported weak sales growth in the first quarter. Starbucks, Pizza Hut and KFC all experienced a drop in same-store sales, while McDonald’s said it adopted a “street-fighting mentality” to compete for value-minded customers.
All of this means that US interest rates are unlikely to move any time soon, as the Federal Reserve, while seemingly desperate to cut rates, is having to show restraint until they get more convincing evidence that inflation is under control, and/or we see firm cracks in the employment picture.
Gold bounced back to close at $2,321 this week. Gold, which has traditionally been seen to protect against inflation and a secure asset, seems to have attracted a new buyer in this cycle: central banks, especially China, who are rapidly building up their reserves at an unprecedented rate. Meanwhile, corporate America announced a flurry of activity during this past week.
Apple set the tone by authorising its biggest share repurchase ever, setting a record for public companies in the process. The tech firm said its board approved a $110 billion share buyback, a 22% rise from last year’s $90 billion approval.
Sony Pictures and private equity firm Apollo Global Management sent a letter to the board of Paramount, indicating that they were formally interested in carrying out a takeover of the company, which is worth $26 billion.
Amazon’s earnings and revenue beat estimates for the quarter, sending its shares up around 2% before the market opened. Operating income more than tripled to $15.3 billion from a year ago. Net income also surged to $10.4 billion.
Meta, Snap and Google all did better than analysts predicted in their first-quarter earnings reports this week, and their ad businesses improved. This was a change from a tough 2022, when inflation made companies reduce their marketing budgets, and a 2023 with layoffs and cost cuts.
Turning to the healthcare sector, pharmaceutical titan Johnson & Johnson has agreed to pay $6.5 billion to settle the lion’s share of class-action lawsuits that allege its talc-based products directly cause ovarian cancer.
Volkswagen’s operating profit fell by 20% in the first quarter as its premium brands experienced lower demand. The company sold 2.1 million vehicles in the quarter, a decline of around 2%.
Tesla achieved a crucial goal to launch its full self-driving suite in China as the country lifted limits on its vehicles, saying they met data security standards.
Several major corporate news events will come out this week which are likely to determine whether the recent bounce in share prices can be sustained. These include reports from Walt Disney, BP, UBS, Toyota and Anheuser-Busch Inbev.
