Doves and falcons
The stock markets in Europe and North America performed well in May and were largely able to equalise the losses from the previous month. This positive development was once again driven by market expectations that the doves could prevail over the hawks in monetary policy. However, the rally stuttered from around the middle of the month onwards, as various data suggested that inflation would remain stubbornly high.
The German stock index DAX rose by 3.16% and the broad European share index Stoxx Europe 600 gained 2.63%. The broad US index S&P 500 rose by 3.18%. The Hong Kong Hang Seng Index achieved a weaker but still positive result with a gain of 0.21%. Global equities, as measured by the MSCI World, advanced by 2.62% - all index figures in euro terms.
The main driver behind this positive performance was once again market expectations that the doves could prevail over the hawks when it comes to monetary policy. The US Federal Reserve (Fed) announced its intention to sell fewer government bonds and thus adopt a somewhat less steep path for its quantitative tightening in future. At the same time, Fed Chairman Jerome Powell said that an interest rate hike was unlikely to be the next step.
As the US labour market also reported fewer newly created jobs in April, concerns about an overheating economy faded. In addition, the inflation rate fell more sharply than expected in April from 3.5% to 3.4% and core inflation (excluding food and energy) from 3.8% to 3.6% - both compared to the previous year. This rekindled hopes of interest rate cuts by the Fed before the end of the year, especially as the markets have firmly priced in a key interest rate cut by the European Central Bank in June.
However, the rally on the stock markets began to stutter around the middle of the month, as various data pointed to a persistent inflation trend. For example, the purchasing managers' index for the manufacturing sector in the eurozone surprisingly rose from 45.7 to 47.3 points. Although this means that the index is still below the threshold value of 50, from which an expanding economy is expected, the sharp rise was achieved even without an interest rate cut. In addition, wages in the eurozone rose, which will contribute to inflation in the long term. And in May, inflation in the eurozone rose again from 2.4% to 2.6% year-on-year. Core inflation also rose from 2.7% to 2.9%. While there had been hopes of several interest rate cuts by the ECB prior to these figures, the markets revised these expectations somewhat.
The bond markets reacted very differently to this. In Europe, yields on high-quality government bonds rose slightly. At 2.66%, 10-year German government bonds yielded 8 basis points higher than in the previous month. In contrast, yields on their US counterparts fell by 18 basis points to 4.50% because Powell said an interest rate hike was unlikely. The yield on high-quality European corporate bonds remained virtually unchanged from the previous month at 3.92%, while their US counterparts were 21 basis points lower at 5.52%. European high-yield bonds benefited the most from the prospect of a key interest rate cut by the ECB in June. Their yield fell by 34 basis points to 6.61%, while that of their US counterparts fell by only 11 basis points to 8.00%.
Gold rose by 1.78% to USD 2,326.99 per troy ounce in May. Shortly before the middle of the month, when hopes of interest rate cuts in the USA were high, a troy ounce briefly cost USD 2,425.
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