Equities

Global equities (-0.2%) were mixed during the month, ending May with an 11.0% loss year to date. Equity markets remained volatile as investors balanced concerns about high inflation, rising interest rates, and persistent geopolitical instability against depressed valuations and resilient economic data. Inflation remained elevated globally; in the UK, headline inflation increased 9.0% annually — the highest rate in 40 years — while the Japanese core Consumer Price Index (CPI) rose at its quickest pace since 2015. In the US, inflation edged down slightly but remained near a multidecade high. Energy prices continued to rise, exacerbated by the ongoing conflict in Ukraine. European Union (EU) leaders announced an oil embargo on Russia, to be phased in over several months. Global central banks continued to adopt tough policy measures to temper inflation, with the US Federal Reserve (Fed) increasing its target rate by 50 basis points (bps). The European Central Bank (ECB) indicated that it is likely to begin raising interest rates this summer, its first rate increase in more than a decade. Despite these headwinds, investors became more optimistic late in the month due to positive economic data and better-than-expected corporate earnings. In the US, household spending increased for the fourth straight month, signaling that consumer spending may be less affected by higher interest rates and inflation than previously feared. In China, authorities began to relax COVID-19 restrictions, with leaders announcing that the two-month lockdown of Shanghai would end at the beginning of June.

US
US equities (+0.2%) stabilized following a significant decline in April. Risk-off sentiment pervaded the market for most of the month, largely driven by concerns that tighter monetary policy could precipitate a recession. However, equities rallied sharply at the end of May amid strong equity inflows and stock buybacks by corporations, robust consumer spending, and the belief that inflation may have peaked. The headline CPI increased 8.3% annually in April, down from 8.5% in March, while core inflation slowed to 6.2%, from 6.5%. The headline Producer Price Index (PPI) also decelerated, rising 0.5% in April after a 1.6% gain in March, bolstering hopes that producer and consumer price inflation have peaked. As expected, the Fed raised interest rates by 50 bps and announced plans to shrink its US$9 trillion balance sheet starting in June, in an effort to curtail inflation. Most Fed officials predicted that interest rates would likely rise by 50-bps increments at the next two meetings, which would provide more flexibility to reassess policy later in the year if warranted. President Joe Biden faced pressure to reduce tariffs on Chinese goods to mitigate inflation, as rampant price increases have clouded Democrats’ prospects in midterm congressional elections in November. At the end of May, the blended year-over-year earnings growth rate for companies in the S&P 500 Index was 9.2% in the first quarter, well above estimates of 4.6% at the beginning of March. The forward 12-month price-to-earnings ratio for the index was 17.1%.

US economic data released in May indicated that the US economy was resilient in the face of inflation and growth headwinds. In April, the labor market remained tight despite more restrictive financial conditions and economic uncertainty. Measures of labor demand were broadly robust, with nonfarm payrolls rising by 428,000, the unemployment rate holding steady at 3.6%, jobless claims near historic lows, and job openings at record highs. Wage growth showed tentative signs of stabilizing; average hourly earnings grew at a more moderate monthly pace of 0.3%, up 5.5% from a year earlier. Consumer purchases of goods and services remained buoyant despite higher inflation, helping to temper fears of a recession. Unadjusted for inflation, consumer spending in April increased by a larger-than-expected 0.9% as outlays on goods and services rose 0.8% and 0.9%, respectively, while total spending in March was revised upward to 1.4%, from 1.1%. Personal savings dipped to 4.4% in April — the lowest level since 2008. In May, the Conference Board Consumer Confidence Index fell to 106.4, from 108.6, with persistently high inflation straining household budgets and forcing consumers to take on more debt to support their spending. Soaring mortgage rates and elevated prices squeezed the housing market. In April, new-home sales plunged 16.6%, new-home construction and building applications slipped, pending home sales dropped for the sixth consecutive month, and existing-home sales fell 2.4% — the third straight monthly decline. US homebuilder sentiment in May tumbled by the most since the onset of the pandemic as builders were constrained by higher materials costs and slowing demand. 

The expansion in US manufacturing unexpectedly strengthened in May as the Institute of Supply Management (ISM) Manufacturing Index rose to 56.1, from 55.4, driven by a large gain in inventories. Details of the report revealed solid demand, labor and supply constraints, and modestly easing price pressures. In April, the ISM Services Index slipped to 57.1, from 58.3; business activity improved across almost all service industries but mounting cost pressures and labor shortages hindered the sector’s growth. Preliminary data for May signaled a solid expansion in the services sector, although the pace of growth was the slowest in four months as demand softened amid higher interest rates, the rising cost of living, and a broader economic slowdown. The National Federation of Independent Business Small Business Optimism Index held steady in April at its lowest level in two years as companies remained anxious about inflation and US economic prospects. 

Six of the 11 sectors in the S&P 500 Index (+0.2%) posted positive results. Energy (+15.8%) was the top-performing sector as the price of oil continued to rise. Utilities (+4.3%) also outperformed, led by the electric utilities (+5.1%) and multi-utilities (+3.3%) groups. Financials (+2.7%) rose, driven by banks (+6.9%). Real estate (-5.0%) was the worst-performing sector, led lower by real estate investment trusts (REITs). Consumer discretionary

Europe
European equities (-0.1%) ended flat amid ballooning inflation, energy tensions with Russia, and economic uncertainty. Stocks dropped to their lowest level in nearly two months before rebounding sharply at the end of May. Surging energy and food prices drove annual headline inflation in the eurozone to a record high of 8.1% in May, up from 7.4% in April, intensifying the debate in the ECB over how rapidly to raise interest rates. Despite the risks of a recession in Europe, ECB President Christine Lagarde signaled that she expects the bank to end its balance-sheet expansion early in the third quarter and begin raising interest rates shortly thereafter. A majority of ECB governing council members support a series of rate hikes starting in July, although markets were unclear about the pace of tightening or how high rates will rise. In addition to strains from the soaring cost of living, weaker-than-expected retail sales and declining consumer confidence signaled that inflation is starting to dampen consumer spending, countering the boost from relaxed COVID restrictions.

European energy prices jumped 39.2% annually in May and are anticipated to remain elevated. Russia cut gas exports to Denmark, Finland, the Netherlands, and partially to Germany over a failure to accept a rubles-for-gas payment scheme. The EU conceded to blocking all seaborne Russian crude oil imports after Hungary’s opposition to a full oil embargo forced the EU to provide a temporary exemption for supplies delivered via pipeline. Germany and Poland agreed to ban pipeline oil shipments from Russia, meaning that 90% of Russian crude oil exports to Europe would be embargoed by the end of the year.

The eurozone manufacturing Purchasing Managers’ Index (PMI) edged down in May as new orders dropped for the first time in almost two years. Although output growth increased marginally, and input and output costs decelerated slightly, business confidence was depressed amid supply shortages, elevated inflation, and softer demand. In contrast, the preliminary eurozone services PMI for May expanded at the second-strongest pace in eight months as pent-up pandemic demand prompted greater spending on tourism and recreation activities. Economic sentiment in the EU waned as industry confidence slipped for the third straight month due to a sharp drop in managers’ assessments of order volumes, and consumer confidence ebbed slightly as expectations about the general economic situation worsened.

Equity performance at a country level was mixed. Portugal (+3.9%), Spain (+3.3%), Germany (+2.2%), and Italy (+2.2%) generated solid returns, while Denmark (-5.4%), Switzerland (-4.4%), and Greece (-4.2%) were notable underperformers. In the UK (+1.3%), consumer confidence fell to its lowest level since 1974, UK business surveys markedly weakened, while inflation spiraled to a 40-year high of 9.0% in April. UK Chancellor Rishi Sunak unveiled a multi-billion-pound fiscal aid package designed to lessen the impact of soaring energy prices.

Pacific Basin
Pacific Basin equities (+0.2%) ended flat, with Japan (+0.9%) leading the region. Japanese GDP contracted at an annualized rate of 1.0% in the first quarter, far better than forecasts of a 1.8% decline. Consensus economic forecasts predicted that GDP would rebound 5.2% in the second quarter, although some analysts warned that higher commodity prices could constrain consumption and hamper the recovery. Japan’s parliament unveiled a ¥2.7 trillion (US$21 billion) supplementary budget to alleviate the rising cost of living. With the yen at a 20-year low against the US dollar, Prime Minister Fumio Kishida outlined long-term measures to mitigate currency weakness, such as reducing oil imports, promoting renewable energy development, restarting idle nuclear power plants, and boosting tourism. Japan’s manufacturing PMI eased slightly to 53.3 in May, signaling a solid, albeit softer, improvement in the sector. Slower manufacturing demand was coupled with more supply-chain constraints, which caused input prices to rise at the fastest pace in 14 years. Japanese core CPI rose to 2.1% year over year in April, hitting the Bank of Japan’s target for the first time since 2015. 

Australia (-2.0%) underperformed. The central bank raised interest rates by a larger-than-expected 25 bps after inflation surged above forecasts to a 20-year high in the first quarter, signaling that additional rate hikes would likely be necessary in the months ahead. The decision was backed by a decline in the unemployment rate to a 48-year low of 3.9% in April and business surveys that showed wage growth starting to pick up. The central bank also projected that its balance sheet will remain large for years to come, and that quantitative stimulus will be withdrawn slowly. Consumer confidence slipped to it lowest level since August 2020 amid mounting concerns about soaring inflation and rising interest rates. Anthony Albanese was sworn in as Australia’s new prime minister after he defeated Scott Morrison’s conservative coalition in the federal election, paving a path for more progressive government policies. Albanese’s center-left Labor Party secured enough votes in the lower house of Parliament to govern without the support of independent or minor parties, although it will still need to win additional legislative backing in Parliament’s upper house. 

Singapore’s (-3.4%) Ministry of Trade revealed that external demand had weakened and forecast that GDP growth in 2022 would be at the lower end of its 3% – 5% range due to China’s economic slowdown and prolonged supply disruptions. New Zealand’s (-2.1%) central bank delivered its fifth consecutive rate hike, raising interest rates by 50 bps and signaling a more aggressive tightening path that will double the cash rate to 4.0% over the next year.

Emerging Markets
Emerging markets (EM) equities (-0.1%) sold off at the beginning of May before finishing flat for the month. Within EM, Latin America was the top-performing region, followed by Asia and Europe, the Middle East, and Africa (EMEA). Latin American equities (+4.0%) rebounded after sharp losses in April as firmer energy prices supported energy and materials producers in Chile (+14.4%), Colombia (+7.6%), and Brazil (+3.8%). Brazil’s economy benefited from higher commodity prices, a strong labor market, and fiscal stimulus, although aggressive monetary tightening by the central bank poses a headwind to economic growth. Despite concerns about rising inflation, Mexico (+2.2%) and Peru (+1.6%) ended higher after a sharp sell-off in April. 

Asian equities (+0.2%) produced mixed results. Thailand (+2.3%) rebounded from a year-to-date low, with international passenger traffic continuing to improve. Taiwan (+2.0%) also advanced as the technology sector started to recoup heavy losses from March and April. The Philippines (+1.8%) edged higher; first-quarter GDP increased by 8.3% year over year amid stronger consumption due to more relaxed pandemic restrictions. The central bank tightened monetary policy, noting that a strong rebound in domestic economic activity and a healthy labor market provided scope to roll back pandemic support and monetary accommodation. Despite a deeper-than-expected contraction in economic activity in April, China (+1.3%) advanced amid improving sentiment, more accommodative financial conditions, and rebounding economic activity due to loosening COVID restrictions in key areas. The central bank indicated that it would promote more credit growth and boost banks’ lending confidence, while China’s composite PMI rebounded sharply in May driven mostly by a recovery in the services sector. Inflation indices pointed to softer increases in input prices and declines in output prices. Despite these encouraging developments, more economists downgraded economic forecasts amid anxiety over the country’s zero-COVID strategy, which is anticipated to hinder consumer and business confidence, constrain spending, and blunt the effects of policy-easing measures. South Korea’s (+0.3%) government passed a record-sized extra budget to offset the impact of COVID restrictions, while the Ministry of Finance rolled out measures to tame surging inflation. India’s (-4.3%) stock market was rattled after the central bank unexpectedly raised interest rates by 40 bps — the first rate hike in four years. The government announced fiscal measures to curb the impact of rising food and energy prices. 

EMEA (-4.6%) was pressured by the ongoing strains of the Russia/Ukraine conflict. The Czech Republic (+5.5%) rebounded sharply, while Turkey (+3.0%) generated positive returns in local-currency terms, aided by the appreciation of the lira. Poland (-0.5%) slipped amid record-high petrol prices and broad-based inflationary pressures. South Africa (-0.3%) ebbed lower amid a decline in gold stocks, and Hungary (-10.8%) sold off sharply after the prime minister announced windfall corporate taxes for many sectors to fund government support for cost-of-living relief

Fixed Income 

Mounting economic growth concerns, a challenging inflation environment, and coordinated policy tightening drove varied results within fixed income sectors. US interest-rate volatility declined while credit spreads ended mixed. 

US economic data releases were mixed. The University of Michigan Consumer Sentiment Index retreated as high inflation prospects dampened the consumer outlook. Headline inflation eased slightly on a modest pullback in gasoline prices, while higher wages offset some inflation pressures, bolstering personal income and spending. The trade-balance gap widened as imports of industrial and consumer goods climbed to meet growing domestic demand. Small-business owners cited inflation and labor shortages as their chief concerns. The unemployment rate held steady and demand for workers remained strong, while nonfarm payrolls beat expectations, driven by private sector gains. Manufacturing and services PMIs were tempered by rising inflation. Regional manufacturing declined, led by weakness in new orders, shipments, and employment segments. Housing market activity was restrained as low inventory, rising rates, and affordability concerns dragged down new-home sales and hindered mortgage applications. The eurozone’s manufacturing and services PMIs contracted amid supply-chain disruptions and persistent inflation. Germany’s year-over-year PPI rose by the most on record due to high energy prices. Inflation in the UK rose at the fastest rate in 40 years, driven by soaring food and energy costs. The UK’s manufacturing PMI fell, not immune to the inflation crisis. China’s industrial production missed expectations as COVID-19 lockdown measures restricted supply chains and distribution. Japan’s manufacturing PMI moderated, hurt by ongoing supply delays. Canada’s unemployment rate dropped to a pre-pandemic low, while Australia’s unemployment rate fell to the lowest level since 1974. 

The Fed hiked interest rates by 50 bps but pushed back on expectations for a 75-bps hike. The Bank of England hiked rates by 25 bps, and UK Chancellor Rishi Sunak announced measures to alleviate the cost-of-living squeeze. The Reserve Bank of Australia hiked rates by 25 bps. ECB President Lagarde stated that the asset purchase programme (APP) would end early in the third quarter, with a rate hike likely coming soon after. The Reserve Bank of New Zealand hiked rates by 50 bps and raised its cash-rate projections, with a peak of 3.9% in the second quarter of 2023. Swiss National Bank President Thomas Jordan stated that he is “ready to act” if inflation pressures continue. 

Most global sovereign yields rose, as expectations for more aggressive policy tightening by major central banks increased, particularly in Europe, following record-high inflation prints. The US was the notable exception, as the prospect of a less aggressive Fed hiking cycle proved supportive for US sovereigns. The US Treasury curve steepened, led by a decline in frontend yields, even in the face of the Fed’s rate hike. Despite the Fed’s hawkish stance, markets focused instead on Chair Jerome Powell’s statement that a 75-bps hike was not actively being considered. Bund yields increased amid soaring inflation, Australian yields increased across the curve, and EM yields predominantly ended lower. The Bloomberg TIPS index returned -0.99% on a total return basis, and the 10-year breakeven inflation rate decreased by 29 bps, to 2.65% during the month. 

Global credit bonds outperformed duration-equivalent government bonds. Within the securitized sectors, agency mortgage-backed securities outperformed, while commercial mortgage-backed securities and asset-backed securities underperformed duration-equivalent government bonds. Within EM, local markets debt (+1.76%) outperformed external debt (+0.03%), in US dollars. Spread widening detracted from results within external debt, while a decline in US Treasury yields had a positive impact. EM currencies’ appreciation drove positive performance in local markets, and movement in EM rates was also beneficial.

Currencies 

The US dollar depreciated versus most major currencies as other major central banks delivered hawkish policy rhetoric and markets priced in a less aggressive pace of monetary policy tightening by the Fed. Disappointing corporate earnings in the US retail industry also weighed on the dollar. The euro led gains within developed market currencies amid hawkish ECB commentary. The Australian dollar gained after the Reserve Bank of Australia hiked rates slightly more than expected while maintaining a bias for further tightening in the coming months. The Canadian dollar was supported by hawkish Bank of Canada rhetoric and rising oil prices. In EM, commodity exporters in Latin America and most central and eastern EMEA currencies rallied while commodity importers (Turkish lira, Indian rupee) lagged.

Commodities 

Commodities (+5.1%) increased, driven by strong energy-sector results. Energy (+9.9%) rose sharply as the conflict between Russia and Ukraine continued to pressure global oil and gas supplies. Gasoline (+17.5%) prices surged, aided by the beginning of the summer driving season in the US, which stoked the demand for fuel. US natural gas (+11.4%) strengthened, as domestic inventory levels continue to lag the five-year average, while the much-needed production response remained largely absent. Crude oil (+10.4%) continued to rise amid a further easing of lockdown measures in China, in addition to an EU agreement on a partial ban of Russian oil, which also contributed to higher gas oil (+5.5%) and heating oil (+3.2%) prices. 

Agriculture and livestock (-1.5%) declined. Coffee (+4.2%) and sugar (+1.4%) rose as cold weather threatened crops in Brazil’s agricultural regions. Wheat (+3.9%) also strengthened after India’s restrictions on exports exposed the extent of tight global supplies resulting from the war in Ukraine. Soybeans (0.0%) and lean hogs (+0.1%) finished flat, while feeder cattle (-1.8%) and live cattle (-2.8%) declined. Cocoa (-2.7%) edged lower on signs of weaker demand and broader concerns about the economic impact of China’s zero-tolerance COVID measures. Cotton (-4.5%) pulled back from a multiyear high as a stronger dollar outweighed an increase in weekly export sales activity. Corn (-7.3%) sold off sharply in the US, with investors weighing China’s decision to allow corn imports from Brazil, potentially hurting the demand for US supplies. 

Precious metals (-3.8%) declined. Silver (-6.0%) and gold (-3.6%) slumped as investors assessed the outlook for monetary policy tightening by the Fed. 

Industrial metals (-6.2%) declined for the second consecutive month, weighed down by uncertainty about China’s plans to ease lockdowns, in addition to weak Chinese manufacturing activity. Nickel (-10.7%) and aluminum (-9.1%) led the group lower, followed by zinc (-4.7%), lead (-3.4%), and copper (-3.2%).

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