Shaw and Partners

In a holiday shortened week, US stocks ended lower as investors assessed the path for the Federal Reserve’s monetary tightening. The S&P 500 lost 1.2%, its eighth weekly loss out of nine. The energy sector outperformed as oil prices rose, with modest gains from consumer discretionary and industrials, while all other sectors lost ground. The tech-heavy Nasdaq fell 1% for the week and suffered a 2.5% loss on Friday. The sell-off on Friday came after the latest non-farm payrolls report, where more US jobs were added in May than expected but it was the slowest pace of growth in a year.

The report reinforced expectations of aggressive monetary policy from the Fed. Earlier in the week Fed vice-chair Lael Brainard cautioned that a half a percentage point rate rise may still be needed in September, if inflation doesn’t slow sufficiently. The next inflation print is due out this week. On Wednesday, the Fed began its process of reducing its balance sheet, pushing up Treasury yields. Volatility has eased compared to prior weeks, however investors were still unsettled by the prospect of recession. JPMorgan’s Jamie Dimon stated an economic “hurricane” was coming due to rising rates, while Elon Musk said in an internal memo that he had a “super bad feeling” about the global economy and could lay off 10% of Tesla’s salaried workforce.

European indices were weaker, with the pan-European STOXX 600 dropping 0.9% as investors continued to worry about inflation, the rate of central bank tightening and the Ukraine invasion. The European Union agreed a ban in the purchase of crude oil from Russia that is delivered by sea. However it included an exemption for crude delivered by pipeline to help give Hungary, Slovakia and the Czech Republic more time to diversify their oil imports away from Russia. Measures against Russia were strengthened, with the UK subsequently agreeing to ban insuring ships which carry Russian oil. European Central Bank chief economist Philip Lane stated that quarter-percentage point rate hikes in July and September would be the benchmark pace for the central bank. The ECB could however face growing pressure to normalise rates faster, given soaring inflation figures. Eurozone inflation surged to a fresh record in May, hitting 8.1%.

Asia Pacific shares fared better for the week, helped by signs of relaxing Covid restrictions. Some of Japan’s strict border restrictions will be relaxed, while Shanghai eased its lockdown measures, and more details were given on China’s economic stimulus. Japan’s Nikkei 225 was up 3.7% while the Shanghai Composite was up 2.1%. Both the Caixin and official manufacturing PMI readings signaled an improvement in China factory activity, although it still remains in contractionary territory.

Colombian assets rallied after the first-round Presidential election. Populist businessman Rodolfo Hernandez will face off against leftwing candidate Gustavo Petro. The Colombian peso had one of its best weeks since June 2020. Most other Latam currencies were however weaker as risk sentiment dwindled. Brazil’s economy expanded 1% in the first quarter, however the outlook for the second half of the year is more uncertain and could dampen President Bolsonaro’s re-election prospects.

Weekly macro highlights

US non-farm payrolls increase in May
Total non-farm payroll employment in the US rose by 390,000 in May. This was above market expectations of a 325,000 increase but fell below the 428,000 expansion registered in April. Following the data from May, non-farm payroll employment remains slightly below its pre-Covid level in February 2020. The data for May was driven by respective job gains of 84,000, 75,000 and 47,000 in leisure and hospitality, professional and business services, and transportation and warehousing. The strength of these sectors helped offset a decline of 61,000 in retail trade employment. Following this data, the unemployment rate was unchanged for the third consecutive month at 3.6% and remains almost in line with the 3.5% pre-Covid level. The labour force participation rate edged up from 62.2% in April to 62.3% in May but remains 1.1 percentage points below its February 2020 level. Average hourly earnings also rose, increasing by 0.3% month-on-month in May to a level 5.2% higher than in May 2021.

Nationwide UK House Price Index rises in May
The Nationwide House Price Index for the UK rose 11.2% year-on-year in May. House price growth slowed from the 12.1% registered in April but was above market expectations of 10.5%. According to Nationwide, the data resulted from high demand, which was supported by strong labour market conditions, with the UK unemployment rate at 3.7% in April. This has helped to withstand the growing headwinds caused by high inflation, with year-on-year headline CPI inflation at 9.0% in May, and an increase in borrowing costs. Nationwide also cited the low stock of homes on the market as a further source of upward pressure on housing prices. The report stated that it expects the housing market to slow over the year, however, as household finances are likely to remain under pressure from high inflation. It also expects the Bank of England to raise interest rates further, exerting a cooling effect on the market through higher mortgage rates.

Eurozone composite PMI slows in May
The eurozone composite PMI fell from 55.8 in April to 54.8 in May, remaining above the level of 50 which separates expansion from contraction. The loss of momentum was broad-based, with both the manufacturing and service sectors losing pace. The service sector declined from 57.7 in April to 56.1 in May as post-pandemic catch-up effects faded. Survey responses for the manufacturing sector indicated that supply-side disruptions, the war in Ukraine and subdued demand for goods were the causes of the slowdown from 54.6 in April to 55.5 in May. Output costs increased by the second-largest extent on record in response to an increase in firms’ input costs. These factors also contributed to a worsening of business confidence, which fell back to the levels seen during the pandemic. Nonetheless, composite employment growth accelerated to a ten-month high in May’s data, while backlogs of work also rose as a result of growth in new business intakes.