In May, markets were driven by inflation concerns, rising input costs and tight labor market. However, the release of the Federal Open Market Committee’s minutes from their April meeting helped US stock indices to make new all-time highs despite an early decline in mid-May. Fed expects global economy to bounce back even with a slow recovery due to the third wave of infections, as well as sluggish vaccine rollout. ECB followed with its financial stability review and economic bulletin. In these statements, the Central Bank showed its optimistic view on financial and economic conditions.
Manufacturers continue to perform well; inflation becomes evident
In May, manufacturing activity was expanding in three biggest economies we follow. Eurozone’s IHS Markit final Manufacturing PMI rose to 63.1, adding to the signs that economy is rebounding quite strongly in the second quarter of 2021. ISM index of US national factory activity increased to a reading of 61.2 as rising demand boosted orders, but unfinished work piled up also due to shortages of raw materials and labor force. China’s factory activity also expanded in May and reached the fastest pace this year as domestic demand and exports picked up – the Caixin/Markit Manufacturing Purchasing Managers’ Index rose to its highest level since December.
The European Commission’s economic sentiment index rose to 114.5 points in May – its highest level since January 2018. Another sign of the economy rebounding (although somewhat worrying) was Eurozone’s inflation figure, which accelerated to 2% in May from 1.6% in April. Inflation was driven by higher energy costs, while core inflation was rather stable at 0.9%. As inflation picked up in US, consumer sentiment deteriorated with University of Michigan’s Consumer Sentiment Index falling to an 82.9 reading from April’s 88.3. In China, manufacturers passed on some of the raw material price pressure on to their customers, as charges for exported good rose at the fastest pace in three years. On the other hand, Services PMI fell to 55.1 in May as input costs rose for businesses.
European and US equity markets
No “Sell in May” this year
At the beginning of the month, S&P 500 added another 1.56% to its value. Markets seemed to embrace the tempo of the ongoing vaccination campaign. More than 50% of the United States population and more than 39% of the European Union population received at least one dose of a vaccine.
Moreover, new Covid-19 cases have declined by 69.8% in the US and by 62.7% in Europe. Additionally, most States removed mask-wearing requirements for vaccinated people. Nevertheless, Europe still mandates wearing masks in public places.
With inflation talks picking up and an unexpected increase in CPI Index by 0.8%, the global markets saw a small correction in the second decade of the month with both S&P 500 and European Stoxx 600 losing around 2%. Despite the rise in inflation, global equity markets were able to recover towards the end of the month. The S&P 500 made a run to 4229 levels (+4.11%) from 4063 and Stoxx 600 surged past 452 (+3.34%) from 437.
Benchmark 10-year bond yields
Dollar is steady, metals keep upward pressure
Inflation, rising yields, crypto crash – apparently nothing can move dollar out of its narrow fluctuation zone. The 1.2250 level we talked about last month was tested and rejected. If we do indeed move higher than 1.2250, our next important hurdle on the upside is 1.2350 before we can consider the major resistance at 1.2500. When we see such an environment, we find it hard to commit to any direction, so we wait for a clearer signal to follow.
Precious metals continued to move higher in May. As we mentioned in our last memo, silver might not take out the 30 dollars per ounce mark with the current attempt, but, again, to us it is just a matter of time when precious metals get everybody’s attention. Similarly for gold – XAU/USD 2000 mark is important with 2200 will most probably act as a strong resistance.
Gold price, USD/oz
Awaiting bond markets to clarify their position on inflation
Inflation talks are still just talks to many. Real inflation scare should be reflected in interest rates and yields too, should it not? Copper, lumber and many other commodity prices are at record highs, but bond market does not quite show a real concern, with government bond yields barely moving in May and high-yield segment in developed markets showing similar ignorance. Actually, 10-year Bund chart shows perfectly defined uptrend in price and right now the price sits on the 10-year long uptrend support, indicating a buying opportunity, which market always respected and followed since 2011. Hence, coming weeks should give us clearer view on inflation from bond market participants – will we see a bounce off current levels and go higher (to lower yields again) or “govies” will fall through current support and make things more interesting.