April tends to offer a mixed bag in terms of weather conditions. This year, it also did so in terms of economic indicators. The data met the low expectations that had been held for them but were sufficiently mixed that, as in one of those old-fashioned sweet selections, everyone could pick and choose exactly what they wanted. For the most part, the equity markets focused on the positive signals and therefore not only achieved good monthly performance across the board, but even reached some new record highs (for the S&P 500, Nasdaq and the Swiss SMI). In percentage terms, the purported half-dead European markets gained the most (the Dax rose by 7.1%), while the Asian emerging markets, whose macroeconomic signals were the most promising of all, lagged behind, with an average gain of around 2%. The stock markets were helped not only by the absence of major political interference and very low volatility again, but also by the tailwind from the central banks. For their part, they had already struck a much more dovish note in the first quarter, ruling out interest-rate hikes for the time being. But the markets took this story a little further and, in the case of the U.S. Federal Reserve (Fed), even began to price in interest-rate cuts this year. But the Fed probably will not do them this favor, as its meeting on May 1 suggested. On the whole, however, it appears that the stock markets are believing in Goldilocks again: economic growth is just right, without the danger of inflationary heat and consequent interest-rate upward pressure. The downside of this superficially perfect world is that interest rates can only remain so low because it is not only inflation that is lacking – economic growth is lacking, too. This lack is corroborated by the fact that yields on 10-year inflation-protected U.S. government bonds have been almost halved since the beginning of the year. And even though yields have moved somewhat away from their record lows, they remain in alarmingly low territory: 10-year Bunds yields were 0.014% at the end of April and the gap between 2- and 10-year U.S. government bond yields was just 20 basis points, not far from a yield-curve inversion. In the coming months, we believe economic figures will have to show whether they support the view of the bond or the equity markets. But even for the latter, a good deal of growth would be needed to justify stock markets' strongest start to a year in over a decade.
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