Macro and Markets Monthly
The global economy has continued to generate little more growth than economists had expected and the persistence of inflation. Central bankers remain on watch, with the Federal Reserve still in a mind frame of tightening monetary policy. The economic data has generally come in above expectations, and inflation news has been far more robust than economists had forecasted (chart1)
Growth in Europe and the United States has proved more robust than expected, with the service sector providing most of the momentum. Indeed, industrial confidence surveys show that the manufacturing sector could already be facing a sharp slowdown. However, the service sector has continued to power ahead.
Chart 1: Global economic surprise – inflation and growth
(% yoy)
Source: Bloomberg
China was the most disappointing economy throughout the month. The economy has not shown the vibrancy that many had expected after the post covid re-opening in January. There has been a slew of disappointing data points in the past month. In particular industrial production growth was at just 5.6% against market expectations of 10.9%. Retail sales and fixed asset investment all came in below expectations.
Chart 2: Economic surprise for China points to loss of momentum
Source: Bloomberg
Central bankers continued to raise interest rates. The major central banks will likely have to raise rates further in the coming months. The Federal Reserve, despite giving the impression that they might skip a rate rise at their next meeting, now look likely to raise rates still further at their June meeting after inflation surprised to the upside. The Bank of England has a particular problem as core inflation re-accelerated to 6.8% from 6.2%.
Chart 3: Central Banks continued to raise rates
Source: Bloomberg
Chart 4: US 10-year bond yield adjusted for inflation 
Source: Bloomberg
Markets
Equities
The equity markets had a mixed month ending net down in most markets. Investor worries about a future global recession were exacerbated by the change in economists' views on the peaking of US interest rates weighed on sentiment. By country, Japan was the standout with an excellent month. For the first time in a while, international investor interest is very evident as investors buy-in to the idea that corporate restructuring could be for real on this occasion. The announcement by the Tokyo stock exchange at the beginning of the year that companies would risk being delisted if they didn't improve their governance practices and profitability has had a real impact.
Table 1: Equity Market Returns in May
| US Equities | 0.5% |
| Europe ex UK | -5.2% |
| Japan equities | 6.1% |
| UK equities | -5.4% |
| Switzerland | -1.9% |
| Asia ex Japan | -2.1% |
| Russell 2000 | -1.1% |
| FTSE Small | -1.7% |
| India | 2.5% |
| China | -3.6% |
| Brazil | 3.7% |
| Singapore | -3.4% |
| Emerging markets | -1.9% |
| Developed Market | -1.2% |
Source: Bloomberg
By sector, the standout was the marked appreciation of the tech sector. Indeed, tech stocks accounted for a substantial proportion of the US equity market return. NVIDIA which reported revenues 50% ahead of expectations rose 36% for the month added close to $250 bn to the market capitalisation of the S&P500 equivalent to 70bps of the value of the index. Alphabet, Amazon and Nvidia in aggregate added two percentage points to the value of index.
Table 2: Market returns by sector in May
| Energy | -9.7% |
| IT | 8.0% |
| Consumer staples | -6.8% |
| Healthcare | -4.6% |
| Banks | -5.2% |
Source: Bloomberg
Bonds, like equities, struggled to make any headway in May. The prospect of higher-than-expected inflation for longer and central banks still on a tightening path led to very modest returns at best. Higher spreads for high yield reflected the investor's concerns that a recession could bring a higher risk of defaults.
Table 3: Bond market returns
| Global Aggregate (Hgd) | 0.1% |
| Investment grade bonds | -0.2% |
| Emerging market debt | -0.3% |
| US High Yield | -0.8% |
FX and Precious metals
The dollar recovered some of its poise after the four percent setback in March/April. Clearly, the prospect of higher interest rates helped. The dollar recovered sharply against the Yen up from 132 to 139 over the course of the month.
Gold was relatively unchanged over the course of the month, although having sold off from much higher levels of $2050 to finish the month at $1962.
Table 4: Monthly performance of precious metals and currencies for May
| Gold | -1.0% |
| Silver | -6.0% |
| $ trade weighted | 2.1% |
| GBP trade weighted | 1.5% |
| Yen/$ | -1.3% |
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