The divergence between the service and manufacturing sectors widened in May, painting a mixed picture of the global economy. The US services flash Purchasing Managers’ Index (PMI) business survey for May rose to a 13-month high of 55.1 and both the eurozone and UK services flash PMIs remained above the 55 level, with anything above 50 indicating expansion. This momentum was supported by robust labour markets. Unemployment remained at or near historic lows in the eurozone (6.5%), UK (3.9%) and the US (3.4%) and wages are growing strongly.
In contrast, the situation in manufacturing is much worse. The eurozone manufacturing PMI business survey fell to 44.6 in May, its lowest level in three years, and US and UK manufacturing PMI readings were also below the important 50 mark, signalling a contraction in activity.
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 31 May 2023.
Commodity markets also experienced some weakness. Oil ended the month down about 40% from the same time last year. Due to steep energy prices last year, negative base effects mean that the energy component is likely to contribute to a further cooling of headline inflation in the current quarter. Price declines in industrial metals were also particularly pronounced in May, which is likely a reflection of lacklustre global demand for goods and a weakening of commodity intensive activity in China.
However, core inflation remained stubbornly high in Europe and the US and the prospect of sustained strong wage growth has fuelled investor concerns that central banks could tighten further, leaving peak policy rates higher than initially expected. Against this backdrop, yields on bonds rose, leading to a return of -2% for global bonds, while developed market stocks fell about 1%.
US
In the US, the debt ceiling impasse between Democrats and Republicans generated headlines over May. By the time of writing though, a deal to lift the ceiling had passed through the House of Representatives and looks very likely to secure the support of the Senate. Despite the drama, equities were relatively resilient with the S&P 500 rising by 0.4%. By month-end the VIX Index, which measures volatility for the S&P 500, traded below 18 which is at the lower end of the post pandemic range.
US inflation temporarily bounced in April, with headline and core CPI (consumer price index) both rising 0.4% month-on-month, roughly in line with expectations. This brings the yearover-year gains to 5.0% and 5.5%, similar to last month’s readings but down sharply from last summer’s peaks of 8.9% and 6.6% respectively. The April increase reflected higher gas and used vehicle prices, both of which have already reversed, suggesting this rise is only a temporary pause on the road to lower inflation levels and should precede much more favourable readings in May and June.
On growth, recent data has been generally comforting. April saw somewhat stronger-thanexpected auto sales, housing starts and employment numbers, suggesting that real GDP is continuing to grow in the second quarter.
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 31 May 2023.
Equity market leadership in the US is very narrow. The largest ten names in the S&P 500 have accounted for nearly all the index’s year-to-date return. Large tech companies outperformed the broader market, backed by strong earnings reports and growing investor expectations about the future potential of AI. In May, growth stocks outperformed value by 6.9 percentage points.
Eurozone
The April eurozone inflation data confirmed that headline inflation was up 0.1% to 7.0% year on year, due to a 3.3% increase in energy price inflation. Meanwhile, core inflation came down 0.1% to 5.6% year on year as a rise in services inflation was offset by a move down in core goods price inflation. Also, food price inflation declined 1.9% to 13.5% year on year, the first significant decline in about two years.
Against this inflation backdrop, the European Central Bank delivered an expected 25 basis point hike, raising the deposit rate to 3.25%. The central bank said the forceful transmission of past rate hikes into tighter monetary and financing conditions justified the change to a slower pace of hikes. Markets currently expect two further rate hikes to a terminal deposit rate of 3.75%. The latest bank lending survey showed a further tightening of credit standards and a pronounced weakness in credit demand.
Consumer confidence barely improved versus the previous month and the back-to-back monthly falls in car registrations pointed to a continued weakness in goods demand in the region. After a strong run since October, Europe ex-UK equites fell 2.1% over the month. Some better than expected inflation prints helped euro bonds outperform in May.
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 31 May 2023.
UK
The Bank of England voted to hike rates by 25 basis point to 4.5%, in a 7-2 vote. The Bank retained existing forward guidance, highlighting that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”.
The April inflation report was not well received by investors. Headline CPI fell from 10.1% year on year to 8.7%, but it was significantly above expectations of 8.2%. Even more concerning was the acceleration of the core CPI component from 6.2% year on year to 6.8%. Core CPI is now at its highest rate since March 1992. Markets re-priced rate expectations to a peak rate of 5.5%.
This pushed yields higher and Gilts ended the month as one of the worst performers among government bonds. UK equities were hit by weak commodity prices. The FTSE All-Share Index fell 4.6% for the month, underperforming its peers.
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 31 May 2023.
Asia
After the end of zero-Covid and a strong first quarter, Chinese macro data for April indicated a slowdown in activity. Imports dropped 7.9% and industrial production grew only 5.8% year on year. This year’s April numbers were measured against last year’s depressed data, recorded during the Shanghai lockdown. The decline in the property market accelerated, with property investments in April falling 6.2% year on year in comparison to a 5.8% drop in March. Chinese equities underperformed the MSCI Asia ex-Japan Index, which returned -1.8 % as Korean and Taiwanese tech stocks outperformed in May.
In Japan, Q1 real GDP rose by 1.3% year on year, driven by strong private consumption and nonresidential investment. April CPI also accelerated further with the BoJ’s key inflation measure (ex. fresh food and energy) rising 4.1% year on year, the biggest rise since 1981. Investors are getting increasingly optimistic that Japan is on the way out of the deflationary stagnation of the past. The TOPIX returned 3.6% outperforming other large developed equity markets.
Exhibit 5: Index returns for May 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 31 May 2023.
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