Manufacturing and services momentum varied globally, impacting economic conditions. Inflation has slowed down, and equity markets have shown mixed results.
Still above target
The trajectory of global economic conditions continues to be set by manufacturing and services momentum progressing at very different speeds. Momentum in services activity remains positive, with labour and wage data also pointing to underlying resilience. In contrast, manufacturing activity remains muted, with contraction in purchasing managers’ index (PMI) readings across several major economies. Chinese economic data for April suggests a weaker economic recovery than many investors had expected. A cooling global economy saw the oil price decline by approximately 8,6% over the month, leaving it approximately 40,8% lower over the past 12 months, while industrial metal prices have also been declining, given weaker manufacturing activity and a lack of meaningful momentum from Chinese industry.
United States (US) politics remained in focus over the month as policymakers barter on a range of topics, with the ultimate goal of raising the US debt ceiling, a decision that would allow the country to keep servicing debt and pay public sector bills.
US headline inflation rose over the month of April, but still moderated to 4,9% year on year (yoy) from 5,0% the previous month, benefiting from a moderation in energy prices. Core inflation, excluding energy and food, came in at an elevated figure of 5,5% yoy. US producer price inflation also declined to 2,3%. Data for the US personal consumption expenditure price index (PCE),
however, surprised to the upside, with the annual rate for core PCE – US Federal Reserve (US Fed)’s preferred measure of inflation – increasing to 4,7% from 4,6% in April. United Kingdom (UK) headline CPI printed at 8,7% in April, a big decline from 10,1% the prior month, but higher than market participants had expected. Eurozone inflation increased to 7,0% from 6,9% in March, driven mainly by energy costs. Core inflation declined marginally in Europe to 5,6% and increased to 6,8% in the UK, the highest print for core inflation in the region since March 1992.
The US Fed, Bank of England (BoE) and European Central Bank (ECB) each increased interest rates by 25 bps in May. The US Fed opened the door for a pause to be considered, in contrast to the BoE and the ECB furnishing their decisions with hawkish commentary indicating the possibility of further tightening. While cooling economic data and evidence of tightening credit conditions may give policymakers reasons to apply caution, resilient employment data continues to represent a handbrake on any meaningful change in policy stance.
Headline inflation is slowly decreasing on lower energy prices and base effects but is still above target for most policymakers across the globe. High levels of core inflation also remain a key concern, especially where accompanied by sustained wage growth, leading investors to account for policy rates that may peak at higher levels, with the added potential of a more gradual path down. This weighed on both equity and bond markets over the month, with added volatility from the looming US debt ceiling deadline.
The S&P 500 gained a mere 0,4% in May, in contrast to the Nasdaq 100, which gained 7,7% over the month as technology counters rebounded on financial results that were deemed to be better than expected. In particular, chipmaker Nvidia provided a boost of 36,3% over the month as investors bank on the potential of artificial-intelligence advances. US equity markets have more recently been characterised by a lack of market breadth, with most of the year-to-date (ytd) performance of major indices like the S&P 500 attributed to the largest 10 technology shares. The Hang Seng declined 7,6% over the month as Chinese economic data weakened, while the MSCI Emerging Markets Index lost 1,7%. Japanese equities posted gains as economic growth and inflation both showed upward momentum, a step change from the deflationary stagnation that has so long characterised that economy.
With this backdrop the US 10-year bond yield had increased to 3,6% by month-end while the US dollar appreciated by 2,6% on a trade-weighted basis in May, leaving the greenback stronger by 0,8% ytd. With UK inflation surprising to the upside, UK gilts underperformed other developed market peers. The Bloomberg Global Aggregate Bond Index declined by 2,0% over the month, leaving the index up 1,4% ytd.
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