“In the United States, first-quarter Gross domestic product grew by 2% on an annualized basis compared with the last three months of the previous year,” says Guy Wagner, Chief Investment Officer (CIO) of BLI - Banque de Luxembourg Investments. “Economic activity continues to benefit from the resilience of domestic consumption, supported by the growing share of spending by the wealthiest households—which are less sensitive to rising fuel prices – as well as by the rapid expansion of artificial intelligence and the accompanying infrastructure investments.” In the eurozone, the situation appears more fragile: growth reached only 0.1% in the first quarter, “even as the energy shock has not yet fully taken effect”. In China, growth remains driven by exports and industrial production, while household consumption is not picking up. In Japan, energy dependence poses a major risk to an economy heavily reliant on oil imports from the Middle East.
Rising energy prices are now beginning to show up in inflation indicators
The closure of the Strait of Hormuz and rising energy prices are now beginning to show up in inflation indicators. In the United States, inflation rose from 2.4% in February to 3.3% in March, while core inflation – excluding energy and food – rose from 2.5% to 2.6%. In the eurozone, inflation accelerated from 2.5% in March to 3.0% in April due to rising energy prices, while core inflation remains, for now, largely unaffected, falling from 2.3% to 2.2%.
Uncertainty regarding the future direction of Fed’s monetary policy
As expected, the U.S. Federal Reserve kept its key interest rates unchanged at its April meeting, the last one chaired by current Chair Jerome Powell. The recent acceleration in price indicators, linked to the conflict in the Middle East, argues for a monetary status quo, “while the prospect of a leadership transition at the institution to Kevin Warsh, who is more inclined to lower key interest rates, introduces increased uncertainty regarding the future direction of monetary policy,” according to the Luxembourgish economist. In the eurozone, the Central Bank also left rates unchanged, while adopting a more hawkish tone for the future, suggesting that a prolonged period of stability could give way to tightening if the energy shock continues to impact inflation figures.
Stabilisation in the bond markets
Following the widespread decline in bond yields observed across bond markets in the wake of tensions in Iran in March, yields generally stabilised in April. The 10-year government bond yield rose slightly in the United States and in Germany. By contrast, it edged lower in France and in Italy, while remaining stable in Spain.
Ceasefire between the U.S. and Iran triggered a dramatic rally in equity markets
Guy Wagner: “The ceasefire between the United States and Iran triggered a dramatic rally in equity markets, on a scale comparable to that seen during the most pronounced recoveries of the pandemic period.” This rally occurred despite the lack of relief in oil prices and the continued closure of the Strait of Hormuz. Over the month, the MSCI All Country World Index Net Total Return rose 8.2% in euros. The rise was particularly pronounced in the semiconductor sector, propelling the Nasdaq up 15.3% to a new all-time high. Regionally, the S&P 500 (in USD) also hit a record high. The Stoxx Europe 600 (in EUR), which has less exposure to technology stocks, Japan’s Topix (in JPY), and the MSCI Emerging Markets (in USD) all rose significantly. “From a sectoral perspective, technology, communication services, and industrials posted the strongest gains, while consumer staples, healthcare, and energy posted significantly weaker, or even negative, returns.”