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As May draws to a close and June begins, financial markets worldwide find themselves at a critical juncture. Economic data reveals a mixed picture, with signs of easing inflation tempered by ongoing concerns about growth and the potential for further policy tightening. Central banks grapple with diverging paths, while oil prices remain sensitive to production decisions. In this week’s recap, we delve into the key developments shaping the global financial landscape, from the U.S. to China, Europe, Japan, and beyond.
The U.S.
U.S. stocks retreated from their monthly highs over the holiday-shortened week, with growth stocks leading the decline. This shift marked a contrast to the earlier trend, as small-caps outperformed large-caps and value stocks demonstrated greater resilience than growth shares. The technology-heavy Nasdaq Composite was particularly affected, largely due to a significant drop in Salesforce following the release of first-quarter revenues that fell short of expectations.
While the week’s economic data, including the personal consumption expenditure (PCE) price index report, mostly aligned with forecasts, a more nuanced look at “supercore” inflation—PCE services excluding energy and housing—revealed a mixed picture. This metric, gaining prominence due to the unique dynamics of housing and rental costs, rose 0.3% in April, indicating a slight decrease from March but a marginal increase compared to February.
Meanwhile, the housing market presented a complex narrative. The Case-Shiller index, reflecting rising home prices in major U.S. cities, reached its highest level since October 2022. This upward trajectory, coupled with increasing mortgage rates, appears to have impacted both mortgage applications, which saw their most substantial decline since February, and pending home sales, which experienced their most significant drop in over three years.
Investor sentiment was further influenced by the Treasury Department’s midweek auctions of five- and seven-year notes, which faced lukewarm demand. This raised concerns among T. Rowe Price traders that funding the U.S. deficit could potentially drive up yields, especially with the Federal Reserve appearing hesitant to lower rates.
Comments from Minneapolis Fed President Neel Kashkari, who suggested the possibility of further rate increases, may have also contributed to a sell-off on Tuesday. Nevertheless, signs of stabilizing inflation were generally well-received by fixed income investors, leading to a decrease in the yield on the benchmark 10-year U.S. Treasury note for the week.
Overall, fixed income markets remained relatively quiet following the holiday weekend, with particularly low activity observed in the high yield segment. The broader macroeconomic landscape, however, weighed on the performance of below investment-grade bonds, which weakened alongside rates and equities. This marked a reversal of the recent trend, as high yield funds reported negative flows.
Europe
Across the channel, European equities faced headwinds as well. The pan-European STOXX Europe 600 Index retreated, driven by hotter-than-anticipated eurozone inflation figures that cast doubt on the European Central Bank’s (ECB) policy easing trajectory beyond June. Major European indices also experienced declines, with France’s CAC 40 and Germany’s DAX leading the way. Italy’s FTSE MIB remained flat, while the UK’s FTSE 100 Index also dipped.
Eurozone inflation saw its first rise in five months, reaching 2.6% in May, exceeding consensus estimates and raising concerns. Services inflation accelerated, and core inflation, excluding volatile components, also increased. However, the unemployment rate reached a record low in April, offering a silver lining.
ECB Chief Economist Philip Lane indicated the likelihood of a rate cut at the June meeting, but emphasized that the pace of easing would hinge on incoming data. He stressed the need for continued restrictive policy throughout the year, albeit with potential adjustments within that framework.
In the UK, net mortgage approvals for house purchases declined slightly, while the Nationwide Building Society’s house price index rebounded in May after two months of decline, suggesting a potential stabilization in the housing market.
Asia
Meanwhile, in Japan, the stock markets performed mixed. The Nikkei 225 Index experienced a slight decline, while the broader TOPIX Index made gains. The downward revision of U.S. economic growth data fueled speculation of potential interest rate cuts by the Federal Reserve, bolstering global risk appetite.
Investors in Japan remained focused on the prospect of further monetary policy normalization by the Bank of Japan (BoJ). The yield on the 10-year Japanese government bond (JGB) rose amid ongoing uncertainty regarding the timing of potential interest rate hikes by the central bank.
The yen continued to weaken against the U.S. dollar, prompting anticipation for data on currency intervention measures taken by authorities.
Inflation in the Tokyo area accelerated in May, driven primarily by rising electricity bills. However, it remained below the BoJ’s 2% target, easing pressure for immediate interest rate hikes. Despite an unexpected dip in industrial output, retail sales in April surpassed expectations, supported by signs of wage growth.
Chinese equities remained relatively stable despite an unexpected contraction in the manufacturing sector, underscoring the ongoing challenges to economic growth. The Shanghai Composite Index held steady, while the blue chip CSI 300 experienced a minor dip. In contrast, Hong Kong’s Hang Seng Index witnessed a more pronounced decline.
The official manufacturing purchasing managers’ index (PMI) slipped below the 50-mark threshold, signaling a contraction for the first time since February. This decline, coupled with weaker figures for new orders and exports, highlights areas of concern within the manufacturing sector. Similarly, the nonmanufacturing PMI, encompassing construction and services, also experienced a slight downturn.
Despite these indicators of weakness, optimism remains regarding China’s ability to achieve its growth target of around 5% for the year. The International Monetary Fund even revised its growth forecast for China upwards, citing supportive measures from Beijing and a stronger-than-expected first-quarter performance.
Policymakers in Shanghai responded to the economic headwinds by introducing measures aimed at stimulating homebuying demand. These measures included easing down payment and mortgage requirements, along with relaxing social insurance and income tax stipulations for non-residents. These localized initiatives follow a broader rescue package implemented by the central government in May to address the struggling property sector, a significant drag on growth.
Oil
Oil prices experienced a weekly decline, culminating in a dip on Friday, as market participants awaited the outcome of the upcoming OPEC+ meeting. Brent and WTI crude futures both retreated, with the latter experiencing a more pronounced drop. The producer group’s decision regarding output cuts, scheduled to be finalized at the Sunday meeting, was a focal point for investors.
Speculation arose regarding the potential extension of some of OPEC+’s deep production cuts into 2025, adding to the anticipation surrounding the gathering. A last-minute change of plans led to Saudi Arabia inviting ministers to convene in Riyadh for the June meeting, although it officially remained an online event.
In the U.S., crude production reached its highest level of the year in March, according to EIA data. However, fuel product supplied, a proxy for demand, decreased slightly. The oil market has grappled with downward pressure due to concerns about prolonged higher U.S. borrowing costs, potentially impacting demand.
Both oil benchmarks were poised for their most substantial monthly declines since December, following a previous session’s drop triggered by an unexpected build in U.S. fuel inventories. However, oil prices received a brief boost after U.S. government data revealed stable inflation in April, fueling expectations of a potential rate cut by the Federal Reserve in September.
Meanwhile, Euro zone inflation exceeded expectations in May, a development that may not deter the European Central Bank from lowering borrowing costs but could potentially slow the rate cutting cycle.
U.S. energy firms maintained a steady oil and gas rig count, while the overall rig count fell for the third consecutive month in May.
Money managers increased their net long U.S. crude futures and options positions, signaling growing optimism among some investors.
Bitcoin
Bitcoin saw a modest uptick in price on Friday, as traders remained cautious ahead of pivotal U.S. inflation data expected to influence the interest rate outlook. However, the cryptocurrency still retained significant gains for the month of May.
Crypto prices were relatively unaffected by a slight overnight decline in the dollar, as concerns about sustained high interest rates persisted despite a downward revision to first-quarter gross domestic product data. Bitcoin experienced a 1.1% increase over the past 24 hours, contributing to a nearly 13% rise for May.
The token remained within a trading range established since mid-March, largely due to fears of high interest rates dampening its price outlook and that of the broader crypto market. Recent remarks from Federal Reserve officials expressing doubts about the easing of inflation have reinforced these concerns.
Key Economic Events to Watch in the Week Ahead
Friday’s Non-Farm Payrolls: A Gauge for Interest Rates
The week kicks off with the highly anticipated nonfarm payrolls report, offering critical insights into the U.S. labor market’s strength in May. Economists anticipate a modest increase in job creation, providing clues about the potential trajectory of interest rates. The report’s findings could influence the Federal Reserve’s decision-making regarding rate cuts or hikes.
ECB’s Rate Decision
The European Central Bank is poised to take center stage as it is expected to become the first major central bank to lower interest rates in this cycle. Market observers will closely analyze ECB President Christine Lagarde’s commentary for hints about future monetary policy actions. The outlook beyond June remains uncertain due to sticky inflation in the services sector, a faster-than-expected economic recovery, and accelerating wage growth.
OPEC+ Output Cuts
OPEC+ is likely to reach a consensus on extending its deep oil output cuts into 2024 and potentially 2025. This move aims to stabilize the oil market amid concerns over sluggish global demand growth, high interest rates, and increased U.S. production. The decision comes as oil prices hover near $80 per barrel, a level below what many OPEC+ members require to balance their budgets.
Bank of Canada’s Rate Cut
The Bank of Canada is widely expected to announce a 25-basis point rate cut following Friday’s GDP report, which revealed slower-than-expected economic growth in the first quarter. This data might prompt the central bank to initiate a policy easing cycle by lowering borrowing costs. The decision comes after Governor Tiff Macklem previously acknowledged the potential need for a rate cut, pending further evidence of slowing inflation.
