As Good as Gold

Last week was a quiet one for equity markets with global equities broadly unchanged.  The only major market to post a gain was the UK which benefited from its high weighting in energy companies. OPEC’s decision to cut oil output by 1.1mbd led to the Brent oil price rising some 7% to $85/bbl.

The major economic news was in the US and related to the labour market. The latter remains a major focus for markets as a result of its pivotal role in whether or not inflation can be brought under control without the need for a recession.

Employment came in broadly in line with expectations, posting another fairly robust gain in March, albeit down from the unexpectedly large increases seen in the previous two months. Meanwhile, the unemployment rate edged down to a lowly 3.5%.

However, just to confuse matters, the latest numbers on job openings and initial unemployment claims were distinctly weaker than expected, suggesting the labour market has in fact softened markedly. Indeed, wage growth has slowed noticeably, as the number of job offers has fallen, even while the unemployment rate has barely moved. Average earnings growth eased to 4.2% in March and is down from a high of 5.5-6% a year ago.

Even so, the Fed still seems unconvinced that the war on inflation is yet won, with officials recently suggesting rates still have a little further to rise. The March inflation numbers released later today will not be unimportant in this respect and are forecast to show the headline rate falling to 5.2% from 6.0% but the core rate edging higher to 5.6%.

The market is now estimating a 70% chance that US rates will be raised a further 0.25% to 5.0-5.25% in early May. Indeed, the BOE and ECB are also expected to hike rates by 0.25% at next month’s meetings.

Much more contentious is the market’s presumption that the Fed will cut rates by 0.5-0.75% later in the year. This will be important not only for bonds but also equities which have been supported in recent weeks by the retreat in bond yields.

Equally critical for equities will be corporate earnings which have held up reasonably well so far. The first quarter US earnings season kicks off on Friday with the big banks. S&P 500 earnings are forecast to be down 5% or so on a year earlier, which would mark their second consecutive decline.

As with interest rates, the earnings outlook for the rest of the year is a topic of heated debate with the market seemingly assuming that earnings will remain resilient in the face of any economic downturn. We are sceptical, both because of the current elevated level of corporate profits and the experience of the past.

Attention will be as much on company guidance as the first quarter numbers themselves and the tech titans should be a particular object of focus. The sharp rebound in their stock prices this year – the FAANGS are up as much as 35-40% – is partly down to the fall in bond yields but also appears to reflect the belief that their earnings will be recession-proof.

Our focus in these commentaries is invariably on bonds and equities but gold this week also deserves a mention. It has tested the $2000/oz mark and is now back close to the previous high of around $2050 reached in August 2020 and March 2022.

Gold is being supported primarily by the weak dollar and hopes of interest rate cuts. But record central bank purchases have also helped as US sanctions have reduced the attraction for certain players of holding dollars. We plan to retain our gold-related allocation in portfolios as its low correlation to our mainstream holdings means it remains a useful source of diversification.


Rupert Thompson – Chief Economist