Markets closed the month of May relatively unchanged, even though all of the major indices pushed to fresh 52-week lows during the month. The April volatility spilled into May before a late-month rally back to finish almost flat. The Nasdaq, S&P 500, and Dow bottomed on May 20. The benchmark S&P 500 hit bear market territory in May after a fall of close to -9% in April and a decline of close to -22% since the highs reached in January. From the lows seen on May 20, the market has bounced almost +9%, with many wondering if it's a dead-cat bounce or a resumption of the up-trend.
The Federal Reserve's monetary tightening remains at the forefront, with the main question being how high will they go to get on top of inflation. The FOMC hiked rates by 50bps at the May 4 meeting, signalling another hike in June (50bps), including the runoff of its balance sheet ($8.9 trillion). The Fed highlighted that keeping inflation under control will be extremely challenging, but they hope for a soft landing instead of an outright recession.The RBA has decided to join other central banks in returning to neutral policy settings more quickly in order to control inflationary pressures and keep inflation expectations stable in the long term. Australian yields lifted following the Reserve Bank of Australia's decision to lift the cash rate by 25bps to 0.35% early in May. The AU3Y government bond yield hit 3.1% following the RBA's decision to close the month at 2.8%. We saw some steepening in the long end of the curve, with the AU10Y yield trading 23bps higher at 3.3% and the AU30Y yield 22bps higher at 3.6%.
Although Australia's cost of living pressures keep consumer sentiment under wraps, the April NAB Business Survey remained strong, showing high business conditions, driving labour market demand. Wage prices grew by 0.7% for the March quarter, and the unemployment rate fell to historic lows at 3.9%.
May 2022 Summary:
- US Inflation remains very high, with annualised CPI at 8.3%
- RBA raised interest rates by 25bps in May to 0.35%<
- AU yields peaked in May and have consolidated lower since
- US stock markets finished in May close to flat, after a bumpy start
- US gasoline prices set a record high at the bowser $4.67 a gallon/li>
- The US economy shrunk by -1.5% in Q1
Australian Interest Rates
The RBA has changed its outlook and policies so that it can return to a more neutral interest rate setting as quickly as possible. This is happening because there are pressures on inflation that need to be dealt with, and it's important to keep inflation expectations stable in the long term. The 25bps move from the RBA in May signals a return of consecutive 25bps interest rate increases in the months ahead. A larger move would also be possible if the Q2 inflation data comes in hotter than expected. Market expectations are anticipating a cash rate of 1.5% by year-end, with further tightening seen in 2023 up to around 2.5%, which is considered the neutral interest rate by the RBA at this time.
US Economy
The headline CPI in April was the same as it was in March, at 0.3%. However, we saw a big increase in food prices +0.9% increase from March to April and also an increase in shelter prices by +0.5%, but energy prices decreased. Many are hoping inflation is peaking, although the numbers are painting a different story, stoking fears that inflation may not be short-lived. The US Department of Labor's Employment Report for April showed that more jobs were created than expected (428,000 jobs added vs. 380,000 expected). The unemployment rate (3.6%) held steady, and hourly wages increased but not as much as expected (0.3%).
Oil Prices
The price of WTI crude oil increased in May by 9.5%, reaching $115 a barrel, +15% from the lows in May at around $100 per barrel. The last time we saw prices this high was back in 2008. The average price of regular gasoline in the US is $4.62 per gallon, which is higher than it has ever been before, according to AAA data.
US Dollar
Persistent inflation levels and a rising interest rate environment are contributing to the strength of the Greenback. The currency reached a high of nearly $105 in the US Dollar Index (DXY) before paring gains and ending the month down -1.1%. The DXY is up 6.4% so far in 2022.
The Months Ahead
The next FOMC interest rate decision will be announced on June 15, which is likely to see a 50bps rate increase. There is a triple witching options expiration on June 17, which is the expiry of stock options, stock index futures options, and stock index options contracts all simultaneously on the same trading day. This can cause volatile price movements in the underlying assets due to the three options classes, which share the same underlying asset, expiring at the same time. June 24 will see the annual Russell Reconstitution, historically one of the highest trading volume days of the year. Corporate earnings estimates will remain in focus, with any revisions lower may cause further selling pressure.