Patience
One of the key factors for equity markets to extend their rally into the end of 2023 was the expectation of official interest rate cuts in the US, UK and Eurozone by their respective central banks. A move in the opposite direction was expected in Japan. The four graphs below depict the change in interest rate expectations in those countries since the beginning of 2024.
The over-optimism of January has been replaced with a more pragmatic reality given the somewhat stickiness of inflation in those countries/regions. However, despite the impatience embedded in financial market headlines for faster reductions in inflation, progress has been made and it has been significant. The following chart of UK inflation along with the Bank of England’s policy (bank) rate is a case in point.
And on the final day of May, the US Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index was released and was in line with expectations at an annual rate of 2.7%.
Green Shoots
Better economic output data was evidenced in both the UK and Eurozone last month. Nothing to get too excited about but better than expected in both areas. Whether the UK’s improvement was the trigger for a General Election announcement for July 4th is open to question, but the timing was a surprise if the market reaction (or lack of) wasn’t.
While green shoots may be evident in the UK and Eurozone, the US economy’s engine – consumer spending, would appear to be reacting to higher interest rates.
Companies such as Walmart and Best Buy have reported an increase in sales of cheaper own-label alternatives and credit card delinquencies continue to rise.
Source: Bloomberg
The following chart from Bloomberg illustrates the gap between the Fed’s official rate and inflation and goes some way to explain the previous chart.
Chinese economic data wasn’t exactly sparkling as the following graph from Macrobond and Marquee Finance by Sagar shows. It did, however, prompt Chinese authorities to unleash a significant stimulus in the property market – not before time.
Indigestion
May proved to be a more transitional month, with some degree of indigestion after the year to date rally in risk asset prices. Earnings were in sharp focus, none more so than Nvidia’s (again) but, once again, it delivered. Those that missed expectations, or issued weak guidance, saw their prices descend abruptly.
Markets
Equities
A weaker final week of May took the edge off a nervy yet positive outcome for most stock markets. Japan was again disappointing after a strong run to April. Asia was mixed outside Japan, whereas Europe led the western economies who enjoyed decent returns. The FTSE Europe ex-UK, up 3.7%, the S&P 500 index up 3.2% and the FTSE All Share up 2.4%. Thematic equities* were led again by energy transition and artificial intelligence – all up 6% or greater in May. Cybersecurity and Healthcare were negative contributors.
*as represented by holdings in T. Bailey Funds.
Bonds
Oscillations in sentiment surrounding interest rate expectations were not a positive backdrop for government bonds as yields rose. Heavy issuance in the US, and to a lesser extent in the UK, weighed on those markets. Fiscal dominance – bond investors are seeking greater yields to hold US Treasuries as fears about the “debt cliff” take hold. The interest on US debt is approaching the largest line item in the budget, surpassing defence spending. Credit spreads generally held in.
Commodities
Copper and gold had a rest, giving back some of their recent strength, most evident in copper after April’s surge. Oil was also weaker in May but natural gas prices had a strong month. Silver had the best month, up around 14%.
Currencies
Better growth, lower inflation and no rate cut envisaged by markets in June helped Sterling to a better month, principally against the US dollar which was weaker on lower economic data and a downward revision to first quarter economic growth or GDP. The Dollar index had its first decline in 2024.
Your Money
All T. Bailey Funds enjoyed a positive month. There was little change to holdings with some trimming of thematic holdings that had performed strongly. Those proceeds were reinvested in a global equity mandate with a focus on finding companies attractively valued/priced.
Multi-manager funds were helped by another strong showing from their holdings in the energy transition theme.