Weekly View – SHOW TIME

The CIO Office's view of the week ahead.

In his testimony to Congress last week, Fed chairman Jerome Powell delivered a dovish report, reinforcing current expectations for a rate cut later this month. He focused on mounting risks to the US economy due to slowing global growth and persistent trade uncertainty over June’s strong US jobs report. Despite a higher-than-expected CPI inflation print for June, consistently low inflation remains the central bank’s main concern. Because the Fed is clearly on course to prolong the US business cycle as long as possible, we do not see a recession as imminent and think the looser monetary policy will support US equities, although an earnings recession could come sooner. We also think the US dollar will see moderate depreciation over the next 12 months.

South of the border, Mexico’s technocrat finance minister Carlos Urzúa quit unexpectedly, publicising a litany of scathing complaints about the government on his way out. Investors took fright and the peso lost over 2% on the news. Mexican bonds were trading at levels suggesting an imminent downgrade, even before Urzúa’s sudden exit. That being said, given the dovish Fed and Trump’s new push for dollar weakness, we are happy to own emerging market local currency debt. 

With weakening PMI figures in Asia, this week’s focus is on China’s Q2 GDP data, which was weaker than in Q1 at 6.2%, down from 6.4%. However, the June factory output and retail sales were both above expectations, so while Q2 was on the weak side, we can already see signs of stabilisation coming through. This and how the earnings reporting season starts will likely guide markets this week. Not everybody sees an earnings recession yet. But we expect that companies will downgrade numbers and analysts will revise them close to zero (i.e., an earnings recession). That is why we are underweight equities as we go into reporting season, particularly as there have already been a couple of big player profit warnings in cyclical sectors.

César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management

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