Orion Investment Managers Managing Director and Chief Investment Officer, Adrian Meager, provides an overview of the latest international market developments.
In May, world markets were overshadowed largely by a bearish tone as concerns around a potential US debt default, as well as a possible US recession and persistent high global inflation continued to weigh on investor sentiment.
US markets ended May on a mixed note, as the Nasdaq surged to end the month higher by 5.8%, while the S&P 500 eked out an advance of 0.2% for the month, and the Dow Jones closed the month weaker by 3.5%.
US economics data posted a decline in April headline CPI, which came in at 4.9% YoY from a previous reading of 5.0% for March, with annual core CPI which excludes food and energy, printing at 5.5% vs a 5.6% in March. There was also a slight increase in US retail sales, coming in at 0.4% Mom, following two months of declines, albeit weaker than the consensus forecast of 0.8%. The Federal Reserve’s preferred inflation measure, personal consumption expenditure (PCE), rose 0.4% Mom in April, vs the March number of 0.3%, and higher than the consensus number of 0.3%. The YoY PCE number also rose to 4.4% for April, vs the March figure of 4.2%, and higher than the market consensus expectation of 3.9%.
As expected, the May FOMC meeting resulted in a rate hike of 25 basis points (0.25%), which increased the federal fund’s rate from 5% – 5.25%, the highest since 2007. Rhetoric from Fed Chairman Powell alluded to no guidance on further rate hikes, but rather that future decisions will continue to remain data dependent. This has not excluded the possibility of further future rate hikes if required.
European markets ended May weaker across the board, as the bearish sentiment from the US was carried across the Atlantic. The UK market closed lower by 5.4%, even with a slowdown in its headline CPI number to 8.3% YoY vs the 10.1% YoY print registered in March. This is still higher than expected, as food and non-alcoholic drink prices rose 19.1% YoY. Core inflation, which excludes food and energy which are notoriously volatile, surprised the market by accelerated sharply to 6.8%YoY.
In a similar vein, both the German (Europe’s largest economy), and French markets also retreated, ending the month weaker by 1.6% and 5.2% respectively. Germany entered a technical recession during the first quarter of 2023, realising a drop in GDP from 0% to -0.3%, following on from the fourth quarter 2022 contraction of 0.5%. Germany’s annual inflation rate came in at an eight-month low of 7.2% YoY vs the March print of 7.4% YoY. Energy pricing experienced a significant spike for the month of April, up 6.8% YoY vs the notable slowdown in March of 3.5%. Food prices also saw an above average increase of 19.8% in April, but slowing from the 22.3% increase in March. As a result, price caps have been placed on essential goods by several central and eastern European governments, with Greece limiting prices by capping the profit margins of retailers for food and other necessities. In a similar vein, French supermarkets are offering products at lower prices, with a reduction in VAT on food items from Spain and Portugal. The annual inflation print for the Eurozone came in at 7.0%, higher than the previous reading of 6.9% in March.
Asian Markets were mixed, as Chinese markets followed Europe weaker, with the Hang Seng down by 8.33% for the month, and the Shanghai Composite marginally better, ending only 3.6% down for the month, largely on the back of expectations of weaker corporate earnings and the continued selling of Chinese stocks by foreign investors. Factory activity shrank for the second month in a row, with the official PMI numbers coming in at 48.8, vs. the previous April print of 49.2, also lower than the consensus expectation of 5.14. Similarly, the official non-manufacturing PMI, which measures business sentiment in the construction and services sector, also pulled back to 54.5, vs the previous reading of 56.4, which has raised questions about the lack of an economic rebound as slower investment and weak demand continue to weigh on sentiment. However, continued steps to support the economy which include additional fiscal stimulus, an easing monetary policy as well as government backing for first time property buyers by decreasing down payment requirements, bodes well for growth during the remainder of 2023.
By contrast, the Japanese market enjoyed a strong rally, with the Nikkei closing the month up 7.0%, its best performance in more than two years. Annual inflation data accelerated to 3.5% in April, vs. the March print of 3.2% as food prices increased. Core CPI (excluding food, but including energy) rose 3.4% in April vs the March reading of 3.1%. Growth in the first quarter surpassed market expectations, coming in at 0.4%, which marked the fastest pace since the second quarter of 2022, primarily fueled by a strong recovery in private consumption and business sentiment. In addition, there was an unexpected rise in business investment of 0.9%, a bounce back from the 0.7% decline of the previous quarter. The Bank of Japan has noted that while growth is expected to exceed expectations in the near term, a weakening in the appearance of pent-up demand and the lesser impact of government stimulus could hamper growth in the longer term.