Close to final rate increase in the US, but not in Europe

• With the earnings season underway, the big takeaway so far has been from US banks. There were market fears that the US banking turmoil may resurface but financials have reported positive earnings growth bolstered by major US banks. These results have helped alleviate fears that the stress seen in regional US banks would turn into a more systemic risk. As a result, it was a volatile week in US equities, falling during the first part of the week before a notable rebound towards the end of the week.
  
  
• The US Federal Reserve (Fed) looks set to increase its interest rates 25 bps to the 5-5.25% range this week. In contrast with the markets’ expectations of interest rates cuts, we think the Fed will hold interest rates at this level for the rest of 2023 in an effort to bring inflation closer to its 2% target. 
  
  
• The US economy grew in the first quarter of this year but slowed significantly and missed analysts’ expectations. Business investment offset resilient consumer spending as the Fed’s tighter monetary conditions begin to bite. We think a shallow recession in the US is likely. This week, services and manufacturing data for April will help us gauge the magnitude of the growth slowdown – although services are likely to show resilience, underscoring our shallow recession outlook. 
  
  
• The European Central Bank (ECB) is also widely expected to lift its policy rates by 25 bps. Markets expect further increases in interest rates even if the Fed pauses, but not that much as economic growth has nearly stalled in the last quarter of 2022 and the first of 2023. The ECB continues to see inflation as still too high, although it is expected to have slowed down more visibly in April. We think that the divergence in ECB/Fed policies will likely continue to support the euro vs the US dollar.
   
• Unlike in the West, Central banks in Asia-Pacific are increasingly pivoting towards a monetary policy that supports growth. This week, we’ll be watching for the decision from the Reserve Bank of Australia, which is expected to hold interest rates unchanged.  

Here’s what’s happening in our flagship portfolios:

• As mentioned above, we are at the midst of the earnings season. We want to use this opportunity to highlight a few companies we hold in portfolios that have reported robust results in the past week. Going into the quarter there was some apprehension about Big Tech. However, these concerns have been unfounded so far, as Alphabet, Amazon and Microsoft all delivered strong results. Out of the three, Microsoft stood out as their cloud business Azure continued to grow strongly. In the healthcare sector, Thermo Fisher’s results were slightly ahead of expectations with management reiterating guidance for 2023, unlike the recent disappointments from some of its peers.
• Looking ahead, although market confidence has improved this year, we maintain a slightly cautious near-term macroeconomic and market view due to recession risks we see ahead and an uncertain corporate earnings outlook. In addition, as economies enter the late stage of the market cycle, risks of heightened volatility tend to increase.
• As a result, we maintain our current near-term strategy of:
  • a below-normal equity exposure and above-normal fixed income exposure,
  • a bias towards quality investments within equities, and
  • a preference for developed market government bonds over riskier bonds within fixed income.

Past performance is not a reliable indicator of future returns.