Weekly Market Insight

Weekly Market Insights – 7th June

07th June 2022

US manufacturing and service sector data for May beats expectations, central bankers again remind investors interest rates will move higher over the summer and every little helps for oil markets as OPEC+ ramps up output. All these stories and more are covered in this week’s insights update from BlackBee.

Economy

Last week we saw a few more nuggets of data helping investors assess the health of the main global economies. In the US May ISM Purchasing Manager Index data came in better than expected with readings well over 50, suggesting a solid growth backdrop for the US economy. This picture was reinforced by the May employment report which showed that 390,000 jobs were created in the month (higher than expected) and that the unemployment rate remained low at 3.6%. So despite the risks on the horizon it is clear that there is still good news emanating from the US which does seem to validate the US Federal Reserve’s intention to increase interest rates to take some heat out of inflation and economic momentum.

Switching to the Fed, we saw further comments from a number of prominent Fed members (Brainard and Waller) making the case for 0.5% interest rate increases to remain the case for the next few meetings. However, there was also some acknowledgement that the committee would then reflect on its next steps bearing in mind the impact these hikes had on US inflation and growth. This makes sense and in our view investors will take some encouragement from this approach also.

In the Euro area, ECB Chief Economist Philip Lane also commented on the outlook for ECB interest rates as inflation in the region hit an all time high of 8.1% in May. Like others in the ECB Governing Council of late, Mr. Lane validated the view that interest rates would rise in the short term but appeared to limit rate hikes to 0.25% at meetings which we believe makes sense given the Ukrainian war that continues to overshadow the economy. 

Equities

Conditions remained choppy across equity bourses last week but a number of markets managed to register some gains. The comments from Fed members noter earlier appeared to have little impact on trading, suggesting that investors are becoming accustomed to the notion of sharp increases in interest rates over the next few weeks. Microsoft also lowered its Q4 revenue guidance (ending 30 June) although much of this was down to dollar strength rather than any read through for demand in its various markets.

Bonds

Sovereign bond yields resumed their climb last week with yields rising and prices falling in response to the fresh high for Euro zone inflation and the hawkish comments from central banks across both sides of the Atlantic. The fact that the keenly watched May ISM manufacturing data came in stronger than expectations also further supported the rise in yields. Conditions were a touch easier in credit markets although both high yield and emerging market bonds still gave back some ground. 

Commodities

The big news in commodity markets last week was OPEC’s decision to increase oil supply as a response to the potential impact of an EU embargo on Russian output. The cartel announced that it would increase daily output to 650,000 barrels per day in July and August compared to previous planned supply of 400,000 barrels. In the short term this should help the world economy a little although in our view more is needed if a further increase in oil prices is to be avoided, especially as demand rises over the summer season. 

Sector News:

Commercial Property – Industrial and Logistics assets remain in a sweet spot in Q1

Last week’s Q1 update on the industrial and logistics sector from Knight Frank shows that it remains very much in vogue. Total take up in the Dublin market in Q1 hit 89,000 sq. metres, the second strongest opening quarter over the past five years. Ongoing strong demand and limited supply for high quality space continue to be the two main factors driving the sector higher, with rents up 9% over the past year and prime rents firm at 4%. As well as the prevailing trends of ecommerce and supply chain realignment that have been so prominent over the COVID era, the invasion of Ukraine is also another issue that is pushing businesses to hold larger inventories of late which again supports demand for larger units in particular. 

Hospitality – CSO data show traveller numbers into Ireland continue to recover

For some time now we’ve commented that trading conditions in the hotel sector have been improving, particularly for provincial hotels which are more exposed to domestic economic conditions. However, for Dublin hotels to thrive it is imperative that business and leisure travel into Ireland recovers. In that vein last week’s April travel data from the CSO would have provided another boost. For the month as a whole almost 1.5 million people travelled into the country, a massive increase compared to the mere 69,400 that travelled the year before. Although April 2022 was still 14% lower compared to 2019 levels we are encouraged that travel numbers are rapidly closing back in on pre-COVID numbers. Our chart of the week shows that on a 12 month rolling basis this is certainly the case.