Muzinich Weekly Market Comment: Spanner in the works?

June 24, 2024

In our latest roundup of developments in financial markets and economies, we look at the reaction to the latest Bank of England meeting and implications of higher oil prices.  

Last week was one of consolidation. Government bond yields fell slightly in most developed markets, with UK gilts outperforming in a week that saw the release of key inflation data and the Bank of England’s (BoE) latest monetary policy meeting.

There was good news for the BoE as May’s consumer prices fell back in line with its 2% target for the first time in almost 3 years,¹ beating the European Central Bank (ECB) to the same objective, although the latter had already cut policy rates earlier in the month² (See Chart of the Week).

Digging into the data, sticky service prices remain a concern. In May, they fell less than expected to 5.7%. As such, it was no surprise to see the BoE leave policy rates on hold at 5.25%. While 2 members of its monetary committee supported a 25-basis points (bps) rate cut, the other 7 members voted for no change.

However, the BoE’s communication following the meeting suggests policy loosening could begin in August, stating those voting for no change saw the decision as “finely balanced” and didn’t think the news on service inflation significantly altered “the disinflationary trajectory the economy was on”.³

The overnight interest rate swap market is currently pricing in a 66% chance for a cut in August and 99% chance by September.⁴

Carry on credit

Carry was king in corporate credit last week, with emerging-market credit the strongest performer within the high-yield universe. In investment grade, Europe outperformed following a strong French government bond auction. On June 20, France raised €10. 5 billion through the sale of 3-8-year bonds.

Sovereign yields fell across Europe, reversing a selloff at the start of the week that came after disappointing flash June Purchasing Managers’ Index (PMI) data.⁵ Although the composite PMI remains in expansionary territory at 50.8, it fell well short of economists’ projections of 52.5. An accelerated contraction in manufacturing was the main driver, with the Eurozone Manufacturing PMI falling from 47.3 in May to a six-month low of 45.6 due to a marked reduction in new orders.

The European Commission (EC) reprimanded seven nations, notably France and Italy, for running “big deficits” that leave their budget shortfalls above the euro area’s 3% limit.⁶  This will subject them to the EC’s Excess Deficit Procedure and potentially significant fines if the issues are not addressed. The next stage will require the delivery of medium-term fiscal plans by September 20, with all seven countries needing to demonstrate their commitment to reigning in net spending over the next four years.

Falling confidence in the private sector and seemingly no alternative but fiscal austerity could again leave the region dependent on ECB policy to support growth. However, the overnight interest rate swap market is only pricing in a 68% chance the ECB will cut in September and just 44bps of loosening for 2024.⁷

Elsewhere in the markets

Currency and equity markets were quiet last week. If there was a winner, it was oil, up 4% on the week and almost 10% on the month-to-date low. This begs the question: could oil, again, be the spanner in the works that stops central banks from normalising policy and pushes the hoped for economic soft landing into a stagflation scenario?

Oil prices were driven higher by a surprising 2.2 million barrels decline in US crude stockpiles.⁸ Oil bulls point to the strong dynamics in place for the third quarter, driven by increased road and air travel, while Chinese stimulus measures could also fuel demand. At the same time, supply remains constrained as Russian crude flows fall and with OPEC not due to unwind voluntary supply cuts until October.

Oil price backwardation — a situation where spot prices are higher than futures prices — has accelerated in June. This happens when there is increased short-term demand and is seen as a bullish price indicator. As such, Brent at US$90 — it is currently just under US$83 — is again a possibility.

Chart of the Week: Bank of England back on target

Source: Bank of England, European Central Bank, of June 21, 2024. For illustrative purposes only.

References

[1] Office for National Statistics, as of June 19, 2024
[2] European Central Bank, as of June 6, 2024
[3] Bloomberg, ‘Closing in on August cut, absent big CPI shock’, as of June 20, 2024
[4] Bloomberg, as of June 21, 2024
[5] S&P Global, Hamburg Commercial Bank, ‘HCOB flash Eurozone PMI, as of June 21, 2024.
[6] European Commission, as of June 19, 2024
[7] Bloomberg, as of June 21, 2024
[8] US Energy Information Administration, as of June 20, 2024

Past performance is not a reliable indicator of current or future results.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of June 24, 2024, and may change without notice. All data figures are from Bloomberg, as of June 21, 2024, unless otherwise stated.

------------------------

Important Information

Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2024-06-22-13927