Almost half-way through 2023 and the month of May has witnessed an interesting mix of news across global markets with the U.S. agreeing on an in-principle deal to increase its debt ceiling, Germany slipping into recession, high volatility seen in gold and crude oil prices, as well as the local Rand hitting record lows against the U.S. dollar and breaching $/R19.90 level.
In recent months, “AI,” or Artificial Intelligence, has also become the latest buzzword in the business world with its growth potential dominating headlines across all the financial channels throughout the month of May. The S&P 500's 9% rally this year has been driven by a handful of the index's biggest stocks, a number of which are at the center of the ‘AI’ frenzy that has spread in the wake of the chatbot sensation ChatGPT.
On the market front, the S&P 500's five largest stocks by market capitalization, namely, Apple, Nvidia, Alphabet, Microsoft and Amazon, have outperformed the index for a fifth straight month and are responsible for the S&P 500's entire year-to-date return. Goldman Sachs strategists estimate that generative ‘AI’ could create productivity gains that result in S&P 500 companies expanding profit margins by about 4 percentage points in a decade following widespread adoption.
Growth stocks specifically large tech companies (MSCIWorld Growth), outperformed the broader market +2.4% m/m, with emerging markets struggling and finishing -1.7% m/m down (MSCI EM). Value shares (MSCI World Value) firmly underperformed their growth counterparts, falling -4.5% m/m. Global bonds (Barclays Global Aggregate) offered little protection, ending the month -2.0% lower.
In the U.S., the deadlock over the debt ceiling between Democrats and Republicans in the United States made headlines throughout May. However, on June 1st, the U.S. congress ultimately approved the debt deal. President Joe Biden will enact the measure into law – which will have the U.S. avoid a catastrophic default on its $ 31.4tn debt.
In U.S.economic data, both headline and core inflation rose 0.4% in May, roughly inline with expectations. On an annual basis, the headline increase amounted to 4.9% y/y, marking the slowest pace since April 2021. The core personal consumption expenditures price index, the U.S. Federal Reserve’s (the Fed) preferred inflation measure, rose 4.7% y/y in April, up from March’s 4.6% reading. The print signals that inflation remains sticky, and that insufficient progress has been made in bringing down core inflation. U.S. retail sales rebounded in May, rising 0.4% from the previous month. While this gain fell short of the consensus estimate of 0.8%, it marked a significant improvement compared to the downwardly revised 0.7% decline in March.
The U.S. Federal Reserve’s Federal Open Market Committee (FOMC) implemented the widely anticipated 25 bps hike this past month aligning with market expectations. However, The FOMC indicated a possible pause in June, which could signal the end of the current rate hiking cycle. The latest interest rate hike brings the federal funds rate to a range of 5%–5.25%, the highest level since 2007, prior to the global financial crisis. On the market front, the S&P 500 was up +0.4% in May.
Eurozone’s headline inflation increased 7% y/y in May, surpassing estimates and up from March’s 6.9% print. Meanwhile, core inflation came down 5.6% y/y as a rise in services inflation was offset by a move down in core goods price inflation. As anticipated, the European Central Bank (ECB) decided to moderate the pace of interest rate hikes in May and responded with a 25-bps increase. The ECB noted that previous rate increases were now exerting a notable impact on financial conditions. In related news, Germany entered into a technical recession with the second consecutive quarter of negative GDP growth in Q1 ’23.
In a 7-2 vote, the Bank of England decided to raise rates by 25 basis points to 4.5%. The Bank maintained its existing forward guidance, stating that if there are signs of more persistent pressures, further tightening in monetary policy maybe necessary. Investors did not react favorably to the April inflation report. While headline CPI declined from 10.1% y/y to 8.7%, it remained significantly higher than the expected 8.2%. Of greater concern was the increase in core CPI from 6.2% y/y to 6.8%, representing the highest rate of core CPI since March 1992.
China experienced its slowest consumer inflation growth in over two years in May, with the consumer price index (CPI) rising by 0.1 percent y/y. This reading represents the lowest rate since February 2021. Core inflation remained unchanged at 0.7 percent y/y. in other news, the producer price index (PPI), which indicates the prices charged by factories to wholesalers, experienced its most significant decline since May 2020. It fell for the seventh consecutive month, missing expectations, with a year-on-year decrease of 3.6% in April, compared to a 2.5% drop in March.
In Japan, first quarter real GDP increased 1.3% in March, supported by robust private consumption and non residential investment. Inflation, excluding fresh food and energy, accelerated in May, rising by 4.1% y/y. This marked the largest increase since 1981. Globally, investors are growing increasingly optimistic about Japan's prospects, as the country appears to be emerging from the deflationary stagnation of the past.
In South Africa, inflation cooled this month, with headline inflation easing to 6.8% y/y (expectations: 7% y/y) from 7.1% in March. This was the lowest headline inflation print since May last year. Core inflation edged higher (from 5.2% y/y to 5.3%). Following April’s inflation print, the South African Reserve Bank (SARB) rose rates to the highest level since 2009, saying that the restrictive policy was necessary to curb inflation. The repo rate rose to 8.25% after a 50-bps hike was declared by Governor Lesetja Kganyago.
The rand sank to a record low against the U.S. dollar (breaching $/R19.90) during the month, on the back of hawkish commentary by the SARB’s Monetary Policy Committee, the U.S. ambassador to SA accusing the country of supplying arms to Russia last month and an overall worsening outlook forming for the local economy. The rand weakened by -7.8% m/m against the U.S. dollar and is now down-15.8% YTD.
On the market front, the JSE All Share fell -4.03% m/m amidst a plethora of bad news locally. “SA Inc” shares (domestic-orientated companies) lead the sell off as the growing financial impact of consistent blackouts on businesses dragged down investor sentiment. Financials took the biggest hit falling -8.15% m/m followed by listed property (-4.70% m/m). Bond yields spiked as negative sentiment seeped into the bond market. The yield on SA’s 10-year bond jumped +1.12% over the month, to 11.30%.
Credits: Strategic IQ, Nasdaq, BI