Uncertainty a reliable constant

Progress on trade negotiations set the tone for a strong showing from global risk assets in May, further supported by quarterly US earnings and global economic data that appears resilient for the time being. US technology stocks benefitted from improved sentiment, but also credible first quarter financial results from Nvidia. The company’s share price rose 24,1% over the month but returns year to date are paltrier at 0,6%. The UK and US agreed a trade proposal that saw the 10% minimum tariff retained, cut tariffs on aluminium and steel and moderated taxes on the first 100 000 cars entering the US. Following a constructive meeting in Geneva, the US and China agreed to partially lower reciprocal tariffs imposed on one another for 90 days to allow for negotiations, deescalating tensions between the countries. This leaves current effective tariffs on China at 30% and 10% on the US. Neither country has been immune to the uncertain backdrop. The US printed economic growth of -0,2% in the first quarter as importers frontloaded purchases, while China recorded lower factory activity in the last few prints.

The last of the major credit ratings agencies to do so, Moody’s downgraded the US credit rating to Aa1 from Aaa. While this has little practical implications at this stage, it reflects on both the fiscal trajectory in the US and the growing view that US assets are not as failsafe as once perceived. US long duration bonds saw weak auctions while US long bond yields, a gauge for fiscal risk, edged higher, breeching the 5,0% mark during the month.

US headline inflation eased to 2,3% from 2,4% y-o-y in April, while core inflation remained unchanged at 2,8%. Producer prices slowed to 2,5% from 3,4% the previous month, printing below expectations. Data for the US personal consumption expenditure price index (PCE) declined to 2,1%, while the annual rate for core PCE (the Fed’s preferred measure of inflation) also decreased to 2,5%. Markets continue to watch inflation prints closely for early signs of pricing pressure post implementation of tariffs, although it is arguable too early to see meaningful change. US consumer surveys showed little improvement in May, with uncertainty an overhang. In line with expectations, the US Federal Reserve (US Fed) kept policy rates on hold in May. Minutes form the meeting, released later in the month, highlighted difficult trade-offs with risks to both US Fed’s goals of inflation and employment. Inflation for the Euro area printed at 2,2% y-o-y in April, just above the 2% inflation target. Markets are expecting another interest rate cut from the European Central Bank (ECB) in June. In contrast, UK inflation increased to 3,5% from 2,6% in March, with a notable increase in energy costs while wage costs also showed upward pressure. The Bank of England (BoE) cut interest rates by 25bps in a divided vote with two members voting for a hold. Chinese inflation printed at -0,1% y-o-y, the third month of deflation while core inflation remained steady at 0,5%. Producer prices continued to languish in deflationary territory, falling by 2,7% y-o-y in April.

Global sovereign bonds edged lower over the month as markets digested duration risk, with the Bloomberg Global Aggregate Bond index returning -0,4%. With conciliatory tones soothing market concerns, the upward trend in the gold price lost traction with the yellow metal delivering flat performance over May. The US dollar returned -0,1% in May, bringing the decline year to date to 5,1% on a trade weighted basis.
 

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