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Market Update May Monday 30th 2022

Bad news’ is ‘good news’ as slowing US economic data draws investors back

The US equity markets rose this week, following seven weeks of losses, as a number of economic data touch points signalled a softening in growth, whilst consumption continued to expand despite the high levels of inflation. This served to calm the markets’ view on rate increases, drawing investors back into equities.

As of Friday, London time, US equity markets rose 4.0% over the week, having fallen 18.7% from its all-time high. It was a similar story for the US technology sector which was up 3.4% over the week, having fallen by almost 30% since its peak, taking it deep into bear market territory. European equities increased by 2.4%, whilst the UK stock market rose by 2.5%. Japanese and Australian markets rose by 0.5%, whilst the emerging markets fell 1.2%, although the Latin American subset rose by 3.2%, helped by further near-term weakness in the US dollar and a strengthening oil price. Brent crude rose by 4.3% over the week, now trading at $117.4 a barrel.

First-quarter US GDP revised down to a fall of 1.5%, although consumption continues to rise

US stocks made gains this week, despite a wobble earlier on after the social media group Snap warned of a deteriorating profits outlook due to high inflation, rising rates and ongoing supply chain issues. However, given that the US Federal Reserve’s (Fed) policy of increasing rates is intended to cool the economy to calm inflationary pressures, a series of data releases provided some indication that economic growth is moderating. US home sales for the month of April fell 17%; purchasing managers indices (which measure the month on month change in the economic environment faced by companies) moderated for both the manufacturing and service sectors; and the growth in US capital goods orders, which are an important proxy for future manufacturing output, rose by 0.4% in April, having slowed down from 0.6% in March, whilst also missing economists’ forecasts. In a repeat of ‘bad news’ is ‘good news’, this helped to calm investors frayed nerves over the scale of future US rate increases, tempting investors back into both equity and bond markets.

US Treasuries continue to rally

In consequence, the 10-year US Treasury yield (which moves inversely to price) fell over the week, now trading at 2.73%, having been as high as 3.20% at the beginning of May. Similarly, US 2-year Treasury yields, which are considered a proxy as to the market’s view on future US interest rates, fell to 2.46%, having traded up to 2.82% a few weeks earlier, with US interest rates currently standing at 1.0% (Fed Funds range 0.75% to 1.00%). Whilst German and UK government bonds remained broadly flat over the week, with 10-year yields now trading at 0.97% and 1.92% respectively, both close to their near term high.

Chinese industrial profits for April record their steepest fall in two years, but largely already priced in

In China, news that industrial groups had reported their worst profit decline in two years in April, due to economic lockdowns to contain the spread of the Covid coronavirus, was largely looked through by investors. The Shanghai Composite and Hong Kong Hang Seng fell by 0.5% and 0.1% respectively over the week. Further to this, shares in Alibaba, the eCommerce company, rose by 12% on Friday, on news that its first-quarter earnings had beaten estimates, with revenues rising by 9% year on year.

US inflation data released later today

All eyes are now on the latest US Personal Consumption Expenditures indices due out later today, the Fed’s preferred measure of inflation. Economists have forecasted an increase in prices of 6.2% for the year to April, down from 6.6% in March. Excluding food and energy, prices are forecast to have increased by of 4.9%, also down from 5.2% for March.

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