Monthly Market Snapshot — May 2024

Equities

Global equities (+3.8%) rose in May, ending the month with a 10.6% gain year to date. Robust earnings from some mega-cap technology companies extended enthusiasm for the potential of AI-driven economic growth. The J.P.Morgan Global Composite Purchasing Managers’ Index (PMI) reaccelerated in May after a softer reading in April ended a sequence of six consecutive monthly increases. Interest-rate policy expectations among global central banks continued to diverge due to varying economic growth and inflation rates across the world and increasing desynchronization of economies. Financial markets anticipate that US rate cuts will be delayed until later this year, and US Federal Reserve (Fed) rhetoric was mixed amid sticky inflation and moderating economic activity, highlighted by signs of a softer labor market and milder consumer spending. The European Central Bank (ECB) maintained its guidance for a reduction in the policy rate at its June meeting, while accelerating core inflation raised concerns over the longer-term path of interest rates. The Bank of Japan’s (BOJ’s) plans to hike interest rates were complicated by a larger-than-anticipated contraction in the country’s first-quarter GDP amid softer consumption and business spending as well as lower exports. Currency woes continued as Japan’s finance ministry disclosed a record monthly amount spent to prop up the country’s currency. Russian President Vladimir Putin met with Chinese President Xi Jinping as the two nations strengthen economic alliances amid western sanctions. Bilateral trade between the two nations rose by 26% against a year prior, according to Chinese customs data. Container freight rates for global shipping rose sharply in May as the industry continues to divert routes away from the Red Sea due to the threat of Houthi rebel attacks.

US
US equities (+5.0%) rebounded in May as the S&P 500 Index hit a record high, aided by better-than-expected first-quarter earnings and sizable gains in select mega-cap technology companies, which led growth stocks to significantly outperform their value counterparts. Annualized first-quarter GDP growth was revised lower to 1.3%, down from a blistering 3.4% pace in the fourth quarter, and economic data released in May revealed that the economy continued to moderate amid a cooler labor market, weaker consumer spending, and contraction in the manufacturing and services sectors. The Fed’s preferred inflation gauge – the core Personal Consumption Expenditures Price Index – remained stuck within a narrow range over the last five months, rising 2.8% in April and slightly above forecast. The combination of a gradually moderating economy and persistent inflation generated uncertainty about the timing of rate cuts, with the Fed continuing to indicate that more data was needed to provide assurance that inflation is moving sustainably closer to its 2% target. First-quarter earnings exceeded expectations. According to FactSet, of the 98% of companies in the S&P 500 Index that had reported first-quarter results, the blended year-over-year earnings growth rate for the index was 5.9%, above the 3.4% estimate at the beginning of the quarter. However, the blended earnings growth for the index was -1.8% after excluding the Magnificent 7 stocks.

Economic data released during the month was broadly softer, although the economy still remained healthy. After a series of surprisingly robust results in the first quarter, labor market indicators cooled in April. A 175,000 rise in nonfarm payrolls was solid, but marked the smallest monthly gain in six months, while average hourly earnings grew at the slowest annual pace since June 2021. The unemployment rate ticked higher to 3.9%. Consumer spending eased in April as headline retail sales were flat and below forecast. Monthly personal income growth slowed to 0.3% and personal spending advanced only 0.2% following a downwardly revised 0.7% gain in March. Furthermore, revised first-quarter GDP showed that annual consumer spending growth moderated to 2.0% from a brisk 3.3% pace in the fourth quarter. In May, the Conference Board’s Consumer Confidence Index unexpectedly rose for the first time in four months, to 102.0. The increase was driven by less negative views about business conditions and the labor market, even as consumers signaled greater anxiety about rising prices, their finances, and the potential for a recession. Elevated prices and higher mortgage rates broadly curbed housing market activity in April, including construction; building permits; and pending, new-, and existing-home sales.

Manufacturing activity contracted for the second consecutive month as the Institute of Supply Management (ISM) Manufacturing Index declined modestly to 48.7 in May, from 49.2, with new orders falling steeply amid weaker domestic demand. The services sector slowed sharply in April, with the ISM Services Index falling into contractionary territory (49.4) for the first time in more than two years. The result was well below consensus expectations of 52.0 and reflected a drop in employment, new orders, and business activity. Notably, the prices-paid component rose significantly to 59.2, from 53.4, as firms noted higher costs for products and services. Sentiment among small-business owners remained historically depressed, even as the National Federation of Independent Businesses (NFIB) Small Business Optimism Index rose for the first time this year as sales expectations improved and the share of companies planning price increases fell to a one-year low.

Within the S&P 500 Index (+5.0%), 10 of the 11 sectors posted positive results for the period. Information technology (+10.1%) was the best-performing sector aided by semiconductors & semiconductor equipment (+17.4%). Utilities (+9.0%) and communication services (+6.6%) also outperformed. Energy (-0.4%) was the worst-performing sector, followed by consumer discretionary (+0.3%), led lower by weakness in hotels, restaurants, & leisure (-2.0%). Industrials (+1.7%) also underperformed, driven lower by air freight & logistics(-1.9%) and ground transportation (-1.4%).

Europe
European equities (+3.2%) advanced in May. The European Commission’s Spring Forecast suggested a soft landing for the eurozone economy, with GDP projected to grow by 0.8% in 2024 – unchanged from February’s estimate – despite heightened geopolitical risks. Growth is expected to be largely driven by a steady expansion in private consumption, fueled by gains in real wages and employment. Eurozone unemployment slipped to a historic low of 6.4% as the region’s economic recovery gathered momentum; in May, the HCOB Flash Eurozone Composite PMI rose to its highest level in a year, supported by larger increases in business activity, new orders, and employment. Growth continued to center on the services sector, but manufacturing production improved. Against a better economic backdrop, ECB officials clearly signaled that interest rates will be lowered from historic highs when policymakers meet in June. However, the outlook for additional cuts is less clear after eurozone headline inflation rose for the first time this year, to 2.6% in May, and core inflation accelerated to 2.9%, from 2.7%, amid persistent price pressures in the services sector. The ECB warned that disinflation is likely to be uneven, although policymakers are more confident that inflation will settle around 2% toward the middle of next year. First-quarter earnings for companies in the STOXX 600 Index are forecast to decline by 2.3% from a year earlier.

Europe’s manufacturing sector remained in contractionary territory in May, although the HCOB Eurozone Manufacturing PMI rose to a 14-month high of 47.3, from 45.7, in April. The contractions in output and new orders were only marginal, while factories shed jobs for the twelfth successive month. Encouragingly, business confidence hit a 27-month high, and input costs and output prices continued to wane. The HCOB Flash Eurozone Composite PMI revealed that services sector activity in May improved for a fourth consecutive month, with the pace of growth unchanged from April. New orders rose to a 13-month high, and input costs and output prices increased at a softer pace compared to April but remained above pre-pandemic averages. The European Commission’s Economic Sentiment Indicator increased marginally to 96.0 in May; consumer confidence improved slightly, while industry confidence was broadly stable.

Germany’s (+3.2%) business conditions in the manufacturing sector showed further signs of steadying in May, as the rates of decline in output and new orders eased sharply. The ZEW Indicator of Economic Sentiment in May reached its highest level since February 2022, and the assessment of the current economic situation also improved. In the UK (+1.9%), Prime Minister Rishi Sunak called a general election to be held on July 4, even as his Conservative Party significantly trailed the Labour Party in opinion polls. The UK economy continued to recover from a mild recession as the S&P Global Flash UK PMI Composite Output Index indicated that the manufacturing sector expanded for the first time after two years of contraction, while services sector growth slowed. Markets slashed the probability of a June rate cut after inflation declined by less than expected. In Sweden (+2.4%), the central bank cut interest rates for the first time in over eight years to support the contracting economy and the cooling labor market.

Pacific Basin
Pacific Basin equities (+1.3%) ended the month higher. In Australia (+1.1%), the Reserve Bank of Australia (RBA) left interest rates at a 12-year high of 4.35%, as expected, after inflation was higher than forecast in the first quarter. The RBA also slightly reduced its projections for economic growth and unemployment and raised its 2024 inflation estimate to 3.8%, signaling that interest rates would remain at their current level until mid-2025. In contrast, Australia’s Treasury predicted that inflation would return to the RBA’s target band of 2% to 3% before the end of 2024. Inflation exceeded expectations in April as the monthly Consumer Price Index (CPI) climbed 3.6% from a year earlier, above estimates of 3.4%, while the core CPI remained at 4.1%. April retail sales were nearly flat as elevated borrowing costs and inflation constrained household spending. Slack in the labor market increased amid a rapid rise in the labor supply, while monthly retail sales advanced only 0.1% in April from the prior month, slower than estimates for a 0.2% gain. Australia’s housing rental values hit a record high in April, with the median rent rising 8.5% from a year ago and adding more pressure on consumers.

In Japan (+1.2%), lackluster consumption, persistent weakness in the yen, and a contracting economy complicated the BOJ’s efforts to tighten monetary policy and generated uncertainty about the time frame for additional interest-rate hikes. Japan’s economy shrank in the first quarter as consumers and companies cut spending; GDP fell at an annualized pace of 2%, well below forecasts of a 1.2% decline, driven by lower private consumption, capital spending, and net exports. Notably, personal consumption declined for the fourth straight quarter amid high inflation and persistent declines in real wages. Inflation cooled for a second straight month as the core CPI rose 2.2% annually in April, down from 2.6% in March. The result matched the consensus forecast and marked 25 consecutive months that inflation was at or above the central bank’s 2% target. However, BOJ Governor Kazuo Ueda indicated that service inflation is strengthening, a key factor for the BOJ to determine if a positive wage-price cycle was in place to generate demand-led inflation. Japan spent a record ¥9.8 trillion (US$62.2 billion) in May to prop up the yen after it fell to a 34-year low against the dollar. Markets speculated that the yen’s weakness could force the BOJ to raise interest rates to soften the impact of a higher cost of living. Japan’s trade balance fell into deficit, highlighting the larger economic burden from the yen’s plunge.

Singapore’s (+3.0%) first-quarter GDP accelerated at a greater-than-anticipated 2.7% pace from a year earlier, with growth in sectors such as construction, wholesale trade, and retail trade outweighing a decline in the manufacturing sector. Annual core inflation was unchanged at 3.1% in April, giving the central bank more scope to remain patient with interest-rate hikes amid the risks to economic growth from geopolitical tensions and diverging global monetary policy paths. The government maintained its growth outlook for the economy at 1% to 3% in 2024, thanks to improving economic prospects in the US and China.

Emerging Markets
Emerging markets (EM) equities (+0.5%) rose in May. Asia increased, while Latin America and Europe, the Middle East, and Africa (EMEA) declined.

In Asia (+1.3%), China (+2.5%) recorded a fourth straight monthly gain, with the government unveiling more potent measures to combat the ongoing real estate crisis, including less restrictive mortgage rules, lower down payments for first- and second-time homebuyers, and funding to purchase unsold housing inventory. Consumer prices in April rose for the third straight month, signaling some improvement in domestic demand. However, accelerating industrial production and weaker consumption and private investment in April underscored the economy’s supply and demand imbalances. The IMF upgraded China’s GDP forecast to 5.0% for 2024, from 4.6%, but predicted a lower level of growth starting in 2025. Taiwan’s (+4.8%) inflation rate fell below the central bank’s 2% threshold, easing pressure on the central bank to raise interest rates. First-quarter GDP accelerated 6.56% from a year earlier, beating expectations amid robust technology exports, as the country continued to reduce reliance on China while forging closer economic ties with the United States. In India (+0.8%), GDP grew at a robust annual pace of 7.8% in the first quarter. The combination of above-trend inflation and strong economic growth pushed out the projected time frame for interest-rate cuts.

In EMEA (-2.7%), negotiations on a potential ceasefire in the Israel/Hamas war offered some hope for an end to the conflict. Saudi Arabia’s (-7.5%) first-quarter real GDP fell by an estimated 1.8% year over year but grew 1.3% quarterly as a decline in oil production weighed on the economy. The kingdom prepared to sell a stake in the state-owned petroleum and natural gas company Aramco, hoping to raise as much as US$13.1 billion to fund plans to diversify the economy. In South Africa (-0.1%), tallies for the country’s general election will be finalized early in June. The ruling African National Congress party is expected to lose its majority for the first time amid high unemployment, economic inequalities, corruption allegations, and consistent power cuts. The United Arab Emirates (UAE) (-4.2%) dropped as ongoing geopolitical tensions in the region, oil market volatility, and changing US monetary policy expectations contributed to the decline. Preliminary fourth-quarter GDP grew 4.3%, with non-oil economic growth vastly outperforming overall GDP. In Turkey (+5.9%), foreign investment inflows gained momentum as monetary policy normalizes. Interest rates were held at 50% in May, even as inflation accelerated to nearly 70% year over year in April.

In Latin America (-2.5%), Brazil’s (-3.7%) central bank cut interest rates by a smaller increment of 25 basis points (bps), to 10.50%, after six consecutive 50 bps cuts. Citing the impacts from recent floods in Rio Grande do Sul, the Finance Ministry raised its inflation estimates for the next two years and expects fewer interest-rate cuts and a higher terminal rate. In Mexico (-2.3%), ruling-party candidate Claudia Sheinbaum is widely expected to become the country’s first female president. Continued cartel violence and a weakening of democratic institutions remained key concerns among investors. Chile’s (+1.8%) first-quarter GDP grew at the fastest rate since 2021 as mining output and consumption increased. Interest rates were cut from 6.5% to 6.0%, with the central bank signaling additional reductions in the coming months.

Fixed Income

Most fixed income sectors posted positive excess returns. Mixed economic data set the tone for sovereign yield divergence, and uncertainty around major central banks’ policy paths remained a dominant theme.

US economic data was broadly subdued, underscored by a drop in sentiment measures as consumers perceived unfavorable changes in inflation, employment, and interest rates. Personal consumption remained soft while personal income rose in line with expectations. Retail sales trailed estimates as higher gasoline prices pulled spending away from other goods. The producer price index rose, driven largely by the services sector, while consumer prices advanced, led by increased shelter and gasoline costs. The labor market remained tight; jobless claims posted a modest uptick, and job growth slowed. Pending home sales plunged, led by weakness in the Midwest and West regions. The eurozone unemployment rate fell to a record low. Germany’s slowly progressing economic recovery weighed on business sentiment. The UK’s core and headline inflation edged down year over year, helped by lower energy prices. China’s manufacturing PMI slipped below the expansionary boundary, reflecting the impact of the property market downturn. Japan’s industrial production fell amid a decline in automotive and aircraft output. Canada’s housing starts missed estimates, weighed down by elevated construction costs and higher interest rates. Australian retail sales were weak as consumers remained cautious due to higher borrowing costs and persistent inflation.

Most major central banks held rates steady while signaling differing expectations about the time frame for normalizing monetary policy. The Fed kept interest rates unchanged, with Chair Jerome Powell stating that it will likely take longer than anticipated for policymakers to gain confidence that inflation is sustainably moving toward the bank’s target rate. The Bank of England hinted at a June interest-rate cut before higher-than-anticipated inflation data reduced that prospect. Policymakers at the RBA remained highly vigilant about the upside inflation risks, while the Reserve Bank of New Zealand kept interest rates unchanged and projected that they would be reduced later in 2024. Sweden’s Riksbank became the second developed market central bank to begin lowering policy rates.

Global sovereign yields diverged across developed economies. Yields declined in the US, Canada, and UK, while those in Germany and Japan continued to climb. Investors anticipate the Fed will loosen monetary policy slightly sooner than previously expected amid softer economic releases. Canada’s disappointing economic growth in the first quarter raised the odds that the Bank of Canada will reduce interest rates in June. Eurozone bond yields ticked higher with a renewed focus on higher-than-expected inflation. UK gilt yields fell after inflation slowed to a three-year low. Japanese government bond yields climbed on views that the BOJ will take further steps to tighten monetary policy in the coming months due to signs of steady inflation. In EM, policy easing by some central banks appeared to lose impetus. Mexico’s central bank stated inflationary shocks will take longer to dissipate and retained its restrictive monetary policy. Brazil’s unemployment rate fell more than expected, stoking policymakers’ concerns about further monetary easing. The Bloomberg TIPS Index delivered a total return of 1.72%, and the 10-year breakeven inflation rate decreased by 5 bps, to 2.36%, during the month.

Global credit outperformed duration-equivalent government bonds as spreads tightened. Within the securitized sectors, agency mortgage-backed, commercial mortgage-backed, and asset-backed securities outperformed duration-equivalent government bonds. Within EM, local markets debt (+1.61%) underperformed external debt (+1.80%), in US-dollar terms. Spread widening detracted from external debt performance, while a decrease in US Treasury yields had a positive impact. Appreciation in EM currencies helped results within local markets, and movement in EM rates also benefited performance.

Currencies

The US dollar depreciated versus most major currencies, pressured by more subdued US economic data and the Fed’s softening stance on additional rate hikes. The euro advanced on better economic indicators, despite dovish signals from the ECB. Among the G10, high-beta currencies (Norwegian krone, Swedish krona) and commodity-linked currencies (Australian dollar, New Zealand dollar) led the gains. The British pound rallied on higher-than-anticipated UK GDP in the first quarter. The Japanese yen marginally appreciated but still remained under pressure amid elevated carry-trade appetite due to low currency volatility. Performance was broadly positive in EM. Most Latin American currencies gained versus the US dollar, with the Chilean peso outperforming regional peers as copper prices surged.

Commodities

Commodities (-1.9%) fell in May. Energy was the primary detractor during the period, while precious metals, agriculture & livestock, and industrial metals posted positive returns.

Within energy (-4.7%), the oil complex ended sharply lower, with gasoline (-9.1%), heating oil (-5.8%), gas oil (-5.3%) and crude oil (-5.1%) hindered by weak domestic demand and a surprise increase in oil stockpiles. US natural gas (+17.7%) prices were driven higher by temporary production disruptions due to pipeline maintenance, warmer-than-expected weather forecasts across the US, and recovering LNG demand.

Industrial metals (+1.3%) posted positive returns. Nickel (+2.4%) prices rose as political riots caused supply disruptions in New Caledonia, one of the world’s major nickel producers. Despite weaker demand, regional supply tightness and higher freight costs in Europe buoyed aluminum (+2.3%) prices. Furthermore, the recent ban on Russian metals also pushed aluminum and copper (+0.5%) prices higher. Lead (+1.5%) and zinc (+1.0%) rose as encouraging export and import data in China signaled improving demand.

Precious metals (+2.5%) ended higher. Silver (+14.7%) and gold (+1.4%) prices remained elevated due to persistent geopolitical uncertainty, robust central bank demand, strong retail demand in Asia, and expectations for a US interest-rate cut.

Agriculture & livestock (+2.1%) advanced. Wheat (+12.7%) rallied amid shrinking global stocks heading into the 2024/2025 marketing year, with a decline in Russian production due to drought and frost damage and production cuts in Ukraine and the European Union signaling supply tightness. Soybean (+4.1%) prices increased as the United States Department of Agriculture downwardly revised the crop harvest in Brazil. Live cattle (+3.7%) and feeder cattle (+0.8%) rose due to higher demand prior to the US Memorial Day weekend and a decline in overall inventory according to the Cattle on Feed report. Coffee (+3.1%) was lifted by strong demand and a severe drought that hurt the harvest in Vietnam, a key growing region. Cocoa (+1.0%) prices rose as supplies from the Côte d’Ivoire and Ghana remained tight. Corn (+0.3%) was slightly higher amid concerns about global supplies due to poor weather and crop damage caused by the spread of bacteria by leafhoppers in Argentina. Cotton (-2.5%) declined as favorable soil and moisture levels across the southern growing regions of the US provided an optimistic production outlook. Sugar (-5.3%) prices fell amid robust production in Brazil’s Center-South region and improving weather conditions in Thailand and India. Lean hogs (-8.0%) slid due to ample supply from increased slaughter activity.