12 Jun 2019
Isabelle Mateos y Lago, Managing Director, BlackRock's Chief Multi-Asset Strategist.
“We’re seeing a strong desire for safety and or hedging. It’s interesting that while it hasn’t been a very good month for stock markets in May, they’re still doing OK year to date and yet we’re still seeing this strong bid for safety in the bond market. It suggests that investors are trying to have it both ways and take a barbell strategy. They are staying engaged into the market in case things turn out well, but also wanting to have plenty of safety in terms of sovereign bonds in their portfolios. This is why we’ve seen this rally in the bond market.
“Our view is that - based on fundamentals, based on growth and based on inflation - we don’t see a case for interest rates to remain that low. The big unknown is what is going to happen in the trade tension between the US and China. If this goes sideways or gets better, we think rates are going up. They’re just too low for the strength of the fundamentals globally.
“Why is the market pricing in three rate cuts? As far as US rates go, there’s a desire to buy insurance, primarily related to the trade tension. Yes, growth is slowing, but we’ve known that for some time and we’re not seeing anything particularly alarming in the data points on growth. It seems excessive to us.”
With bond yields and interest rates low, retirement becomes a greater challenge.
Investor Pulse – the largest global survey of the impact of wealth and well-being – shows that retirement readiness remains a problem, particularly for women. Only a third of people believe they will achieve their ideal retirement.
% Likelihood of achieving ideal retirement
Source: BlackRock Investor Pulse, May 2019
The UK manufacturing sector contracted in May as Brexit-related stockpiling eased. It was the first drop since July 2016. The research also showed firms were finding it difficult convincing clients to commit to new contracts. The manufacturing Purchasing Managers' Index (PMI) was 49.4, down from 53.1 in April.1
Commercial and civil engineering projects have been shelved as Brexit bites, causing a contraction of the UK’s struggling construction industry. A monthly update on business conditions revealed a worse than expected performance in May with the PMI slipping back from 50.5 in April to 48.6 in May.2
China’s factory activity expanded at a steady but modest pace in May, although analysts said that firms may be front-loading exports to avoid higher tariffs, masking underlying weakness in the economy. The Caixin/Markit Manufacturing PMI also showed only modest expansion at 50.2, unchanged from April.3
US inflation was weaker than initially thought in the first quarter, as domestic demand slowed easing pressure on the Federal Reserve to raise interest rates. The personal consumption expenditures (PCE) price index – which excludes the volatile food and energy components - increased at a 1.0% rate last quarter.4
US economic growth for the first quarter was revised down by less than expected amid stronger consumption and exports. However, the figures do not take into account the escalation in the trade tension. Inflation-adjusted gross domestic product increased at an annualised rate of 3.1% from January to March.5
1 Manufacturing shrinks as Brexit stockpiling halts, BBC, May 2019
2 Brexit uncertainty triggers slump in UK construction sector, The Guardian, May 2019
3 China May factory activity shows recovery still patchy: Caixin PMI, Reuters, May 2019
4 US inflation much softer in first quarter; puts spotlight on Fed, Reuters, May 2019
5 US Growth Revised Lower by Less Than Expected to 3.1%, Bloomberg, May 2019
UK economy – This week sees a full snapshot of the UK economy with gross domestic product (GDP) figures, services, construction and manufacturing data. UK GDP growth is expected to drop 0.1% quarter on quarter.6
UK earnings and employment - Earnings and employment have been a strong spot for the UK economy. Economists will be watching to see whether the Brexit pause makes a difference.6
Eurozone GDP (Q1) - Quarter on quarter, the Eurozone economy is expected to rise to 0.4% from 0.2%. Year on year growth is expected to remain at 1.2%. The ECB also makes its rate decision this week, but is not expected to change monetary policy.6
6 IG Index, Week Ahead, May 2019
The opinions expressed are as of June 2019 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.
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