30/05/2023

Flash boursier

Key data

	USD/CHF	EUR/CHF	SMI	EURO STOXX 50	DAX 30	CAC 40	FTSE 100	S&P 500	NASDAQ	NIKKEI	MSCI Emerging Markets
Latest	0.91	0.97	11'434.24	4'337.50	15'983.97	7'319.18	7'627.20	4'205.45	12'975.69	30'916.31	972.86
Trend
YTD	-2.11%	-1.93%	6.57%	14.34%	14.80%	13.06%	2.35%	9.53%	23.97%	18.48%	1.72%

(values from the Friday preceding publication)

Business trends slowing

Equity markets moved erratically last week as investors expressed concern about the progress of negotiations on raising the US debt ceiling as well as about the persistence of inflation. AI-linked tech stocks were heavily in demand.

Bond yields rose sharply, with the US 10-year yield back at 3.80% and the German equivalent at 2.50%.

In the US, real GDP growth for the first quarter of 2023 was revised to an annualised 1.3%, compared with an initial estimate of 1.1%, resulting therefore in a less marked slowdown from 2.6% in the fourth quarter of 2022.

In addition, growth in the US private sector accelerated in May, with the composite PMI index rising to 54.5 from 53.4 in April. Specifically, the services sector benefited from stronger demand, while the manufacturing sector saw a slight increase in output. Durable goods orders rose by 1.1% in April, after rising by1.1% in April, following a 3.3% surge in March excluding transportation machinery. They fell by 0.2% month-on-month.

Still in the US, consumer spending rose by 0.8% in April month-on-month, outstripping the consensus forecast of 0.4%.

Personal consumption expenditures (PCE), a metric for gauging inflation, rose by 4.4% year-on-year in April, with a 4.7% surge excluding food and energy – up slightly on their March levels of 4.2% and 4.6%, respectively. These higher-than-expected numbers increase the likelihood of a further Fed rate hike in June.

On the unemployment front, initial jobless claims increased by 4,000 in the week starting 15 May to 229,000, up from 225,000 the previous week, versus a forecast of 245,000.

In Europe, manufacturing activity also slowed in May, with the PMI clocking in at 44.6 versus the estimated figure of 46. By contrast, services continued to perform well, with the services PMI standing at 55.9 compared with 56.2 in April. Overall, economic activity contracted for the first time in three months, while inflation remained high.

The German economy contracted slightly in the first quarter of 2023, marking its entry into recession after two consecutive quarters of GDP growth in the red. GDP in Europe’s leading economy fell by 0.3% in the first three months of the year, adjusted for price effects and seasonal swings. German GDP had shrunk by 0.5% in the fourth quarter of 2022.

The S&P 500 ended the week ahead marginally by 0.32% while the tech-heavy Nasdaq swung upwards by 2.51%. The Stoxx 600 Europe index gave up 1.58%.

Tentative deal on US debt ceiling

Financial markets may regain some calm this week as it appears that a deal has finally been reached on the US debt ceiling. For several weeks, President Biden (Democrat) and Speaker of the House Kevin McCarthy (Republican) have been trying to hammer out a deal to prevent the US from defaulting on its debt for the first time in its history. This means that the country would run out of money and would not be able to borrow new money to finance itself or pay its bills or civil servants’ salaries.

The US reached its debt limit of USD 31.4 trillion in January and the counter continues to rise. Since then, the issue has been at the heart of the debate between Democrats, who want to raise the debt ceiling, and Republicans, who refuse to do so unless the government makes major budget cuts. But time is running out as the deadline is 5 June, which may explain the current nervousness in financial markets. Against this backdrop, yields on short-term Treasury bills have risen, while those on maturities between 5 and 30 years have generally fallen.

The consequences of a US default would be to disrupt the credit market and thus economic activity in general. It would also trigger a recession in the US, which would probably be punished by a downgrade of its credit rating, currently AA+, as was the case in 2011.

This political chess game seems to have finally reached a compromise this weekend. This would involve raising the debt ceiling for 2 years in exchange for a reduction in certain types of spending, but this still has to be approved by Congress. This is not the first time the US has faced the threat of default: the debt ceiling came into effect in 1917 and has been raised 78 times since the 1960s. There will undoubtedly be plenty more news on the subject in the coming week.

Download the Flash Boursier in PDF