Most markets were up last week and while tech stocks and AI beneficiaries continued to lead the way the rally was more broad-based than we have seen recently, with most sectors and markets up by 2 - 5%. The overall market mood around the world was lifted by a benign inflation print in the US which suggested that inflation was subsiding in even the ‘stickier’ services sectors, while a good start to the corporate earnings season in the US also helped. In Australia, the disinflationary theme was especially welcome, and yields fell across the maturity spectrum. Ironically, this was probably helped by the weaker data from China, showing how bad economic news can be good news for such an interest rate sensitive economy. That’s the 100 word summary, of the 800 word AI generated word summary, of a total 4000 words from T. Rowe Price, the AFR and Ausbiz. It’s really quite readable, and a pretty clear summary for clients if you are interested.

So, what do we think is missing from this picture? One positive thing is just how well emerging markets ex-China are doing, especially in Eastern Europe and Latin America. The other side of that coin is that Chinese market returns have been relatively lacklustre, although the market has been highly polarised, and the large tech or EV firms that Western firms tend to be exposed to have been doing well. In recent days Xi Jinping has made it clear that the crackdown on these firms is over and is now appealing to overseas investors in his bid to rejuvenate the flagging economy.

The other thing that the AI, markets, and the financial press has spent less attention on is the juxtaposition between strong corporate and consumer data and weak manufacturing data (which tends to be a leading indicator). Last week the UK and Japan both reported falling industrial production, which fits in with a wider picture seen in Germany, the US, and China. Commodity markets on the other hand have been a little more sanguine, having telegraphed some of this weakness over the last three months.

Turning to the bond markets, the market is highly focused on the near-term intentions of central banks (and the US Fed in particular) as well as longer term rates, which both declined last week. One issue that may be slipping beneath the radar is that slowing inflation combined with cautious, determined central banks might actually mean higher real rates and, effectively, unintentionally tight monetary policy. Last week we saw early signs of that, as lowering inflation expectations caused a spike in very short-term real US rates. This may be something to watch out for in the near future, but for now corporate bond markets are unconcerned as credit spreads, even in the junk bond space, continued to fall.