Economic data showed that April was a positive month for the global economy with growth remaining remarkably resilient in the face of higher interest rates. US, eurozone, and UK Purchasing Managers Index (PMI) surveys all beat expectations, and China’s Q1 GDP print was also stronger than expected.
Falling energy prices helped bring headline inflation down in the major developed economies with the contribution from energy turning negative in the US and the eurozone. In the UK, fuel prices fell while the contribution from broader energy remained positive due to the lags caused by the energy price cap. OPEC announced a cut in production aimed at stabilising oil prices at around $80 a barrel and while this may reduce base effects, the comparison with sky high 2022 prices mean energy should still drag on inflation in the coming months.
This positive economic momentum supported risk assets despite further stress in the banking sector. Developed market equities rose by 1.8% over the month, with value stocks modestly outperforming growth counterparts. Global bonds returned 0.4% with a large part of this driven by investment grade credit which returned 1.2% over the month.
Exhibit 1: Asset class and style returns
Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2023.
US
US business survey data showed economic momentum accelerating over the month. April flash PMIs showed an increase in economic activity across manufacturing and services sectors which both beat expectations.
Investors also received positive news on inflation. Base effects meant that energy took 0.5 percentage points off headline US inflation which printed below expectations at 5.0% year on year. Core inflation increased from 5.5% in March to 5.6% year on year in April, though leading indicators continued to suggest that it should start to moderate in the coming months. There were signs of cooling from the labour market. While the unemployment rate fell to 3.5% and non-farm payrolls grew by 236,000, wage growth softened to 4.2% year on year.
Markets still expect US interest rates to rise by 25 basis points (bps) in May but then think the Federal Reserve will pause before cutting rates at the back end of 2023.
With the value style dominating, the growth heavy S&P 500 underperformed its peers in April with returns of 1.6% over the month. In fixed income falling yields meant US Treasuries outperformed other sovereign bonds, returning 0.5% over the month.
Exhibit 2: World stock market returns
Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2023.
Eurozone
Eurozone data generally surprised to the upside in April though manufacturing remained a weak spot and the divergence between the manufacturing and service sectors further expanded. The manufacturing PMI printed at 45.5, implying a tenth consecutive month of contraction, while the services index jumped by 1.6pts to 56.6, pushing the composite index to 54.4. The divergence, which is the widest in over a decade, looks set to continue as forward-looking indicators in the surveys suggested ongoing manufacturing weakness and service strength in the months ahead. This services strength was also enough to keep eurozone GDP growth positive in Q1, with the economy growing 0.1% quarter on quarter.
Eurozone headline inflation fell sharply as base effects in energy started to drag. The consumer price index fell from 8.5% year on year in March to 6.9% in April. Core inflation, however, increased by 0.1 percentage points to 5.7% year on year. This, combined with upside surprises on economic growth and continued wage pressures, means that markets think the European Central Bank has more to do. While the market is now leaning towards 25 bps in May rather than 50, it still has a total of 75 bps of hikes priced by the autumn.
This more hawkish outlook pushed European government bond yields higher, and European government bonds delivered returns of -0.1% over the month. In equities, the stronger economic sentiment and a value tilt helped MSCI Europe ex-UK to deliver 2.3% over the month, making it one of the strongest performing major equity markets.
Exhibit 3: Fixed income sector returns
Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Global IL: Barclays Global Inflation-Linked; Euro Gov.: Barclays Euro Aggregate Government; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2023.
UK
UK economic data followed a similar pattern. The divergence between the manufacturing and services sectors was also apparent with the manufacturing PMI slipping further into contractionary territory at 46.6 while services beat expectations and rose to 54.9.
UK headline inflation fell from 10.5% to 10.1% year on year in April. It was helped by a slight deflationary impulse from fuel, but the UK won’t see the first step down in broader energy inflation until the April inflation print that is released in May. Core inflation, which had been expected to fall, instead remained flat at 6.2% year on year. This, combined with a hot wage print that saw average weekly earnings increase by 6.6% year on year, pushed yields higher and Gilts ended the month as the worst performing major developed market sovereign with returns of -1.8%. Conversely, domestic UK resilience and exposure to global value stocks helped the FTSE All-Share deliver returns of 3.4%.
Exhibit 4: Fixed income government bond returns
Source: Bloomberg Barclays, Refinitiv Datatsream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2023.
Emerging Markets
Data released in April confirmed China’s reopening-driven rebound. Q1 GDP provided a positive surprise at 4.5% year on year. Retail sales were also significantly above expectations at 10.6% year on year. Despite this, concerns around geopolitical tensions meant Chinese equities ended down 5.0% over the month. Reports of incoming US investment regulations meant that communication services and consumer discretionary stocks were particularly badly hit. This Chinese underperformance meant the regional MSCI Asia ex-Japan Index was the worst performing regional equity market with returns of -2.1% over the month. Positive returns outside of Asia helped partially offset Chinese weakness and the broad MSCI Emerging Markets Index returned -1.1% over the month.
Exhibit 5: Index returns for April 2023
Source: Bloomberg Barclays, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2023.
Conclusion
Data in April showed economic activity remained resilient in the face of mounting headwinds. Equity markets continued their rally and have now broadly recovered from the tumult in March. While near-term recessionary risk seems to have receded somewhat, the closure of another US financial institution at the end of April highlights that the cumulative impact of central bank tightening has still not been fully felt by developed economies. This means that despite the recent improvement in the business surveys, portfolio diversification remains essential in the face of significant recession risk.
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