Signs of the global economy stabilising, that were seen at the start of the second quarter, have dissipated again. In the United States, the May purchasing managers’ indices suggest that the weakness in the manufacturing sector is extending to services. This is the view of Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.
In Europe, the purchasing managers’ indices are not deteriorating further, but nor are they showing signs of improvement. In Japan, first-quarter GDP growth was astonishingly strong at 0.5% quarter-on-quarter. However, the most favourable surprise was the significant decrease in imports, even though consumer spending and corporate investment fell by comparison with the previous quarter. In China, economic improvement remains moderate in spite of the monetary and fiscal stimulus measures taken since the start of the year.
Lukewarm inflation in the United States and Europe
Despite a slight increase in US and European inflation rates in April, inflationary pressures remain weak overall. In the United States, headline inflation rose from 1.9% to 2.0%. Excluding energy and food, the inflation rate was also up by 0.1%, from 2.0% to 2.1%. The Federal Reserve’s preferred inflation indicator, the PCE (personal consumption expenditures) deflator excluding energy and food, remained unchanged at 1.6%. In the eurozone, headline inflation in April came in slightly above expectations, up from 1.4% to 1.7%. Excluding energy and food, inflation also climbed faster than expected, from 0.8% to 1.2%. In the coming months, we expect most inflation indicators to decline due to the slowdown of the global economy.
Interest rate policy pending on both continents
In the United States, the minutes of the FOMC meeting at the beginning of May suggest that the monetary policy committee is currently in wait-and-see mode regarding its interest rate policy until clearer signals can be discerned from the economic data. Given the weakness of inflation and fragility of the global economy, the next movement of the Federal funds rate is likely to be downwards. In the eurozone, the monetary authorities did not comment on their future intentions in May.
Trade tensions and easing government bond yields
In May, the resurgence of trade tensions between the United States and China drove government bond yields down further. In the United States, the yield on the 10-year Treasury note fell from 2.50% to 2.12%, causing inversion of the yield curve. In the eurozone, government bond yields continued to decline, despite a growing number of issues with negative yields to maturity. The 10-year government bond yield declined from 0.01% to -0.20% in Germany, from 0.37% to 0.21% in France, and from 1.00% to 0.71% in Spain. Italian bond yields were alone in bucking the trend, rising slightly from 2.55% to 2.67%, following the Northern League’s victory in the European elections.
Slight correction on the equity markets
After their strong rally in the first four months of the year, equity markets fell back in May. The Trump administration’s new round of protectionist measures, like the introduction of further customs tariffs on Chinese imports, the executive order barring American companies from supplying electronic components to the Chinese telecoms giant Huawei, and the threat of customs tariffs on imports from Mexico, put a damper on the equity markets. The MSCI All Country World Index Net Total Return expressed in euros gave up 5.4% over the month. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets were all down, shedding 6.6% (in USD), 5.7% (in EUR), 6.5% (in JPY) and 7.5% (in USD) respectively. In terms of sectors, so-called defensive stocks like utilities, healthcare and non-cyclical consumer goods held up relatively well, while tech stocks saw the biggest correction.
The euro/dollar exchange rate was virtually unchanged in May at 1.12. The trade tensions between the United States and China boosted the Japanese yen, which appreciated by 3% against the euro during the month.