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Global equities (-7.4%) declined during the month, ending June with a 17.5% loss year to date — the worst start to a year in decades. Equity markets fell sharply as investors grew increasingly concerned about soaring inflation, rising interest rates, and a higher likelihood of recession. Inflation remained elevated globally, with the US Consumer Price Index (CPI) and eurozone CPI both rising 8.6% year over year. High inflation has primarily been driven by surging food and energy prices, although the price of crude oil and gasoline retreated after peaking early in June. Most global central banks continued to adopt hawkish policy measures to rein in inflation, with the US Federal Reserve (Fed) hiking its target interest rate by 75 basis points (bps). While Fed Chair Jerome Powell referred to the move as “unusually large,” he forecast similar moves in the coming months, indicating that either a 50- or a 75-bps increase seems most likely at the next meeting. In sharp contrast, the Bank of Japan (BOJ) maintained its stimulus program in hopes that it can achieve a sustainable 2% inflation rate. The G-7 summit in Berlin concluded with the group reaffirming its support for Ukraine, but economic pressures have dampened the West’s appetite for tougher sanctions against Russia. Supply-chain constraints, a key driver of inflation pressures, appear likely to persist as the Russia/ Ukraine conflict and China’s zero-COVID policy continued to hamper supplies. China’s economy began to rebound in June after lockdowns eased, although the recovery has been muted.
US equities (-8.3%) fell sharply, pushing the S&P 500 Index further into bear-market territory. Surging inflation, tighter financial conditions, and moderating economic activity have increased the probability of recession. However, disparities in the forecasts of economists indicated that there is considerable uncertainty about US economic growth prospects. Market participants debated whether depressed sentiment and positioning indicators were potential contrarian buy signals and whether stocks had sufficiently capitulated. Surging prices for food and energy pushed consumer inflation up to its highest level in more than four decades; the headline CPI increased 8.6% annually in May (6.0% at the core level), undermining hopes that US inflation has peaked. Following the larger-than-expected increase in inflation, the Fed hiked interest rates by 75 bps and forecast that rates could rise to 3.4% by the end of 2022 and 3.8% by the end of 2023. Fed Chair Powell stated that the US economy could withstand tighter monetary policy without sliding into recession but conceded that outside factors (the war in Ukraine and supply disruptions from China’s COVID policy) have made it more difficult to tame inflation and maintain positive economic growth. Markets looked toward second-quarter US corporate earnings with some caution, with high input prices, weaker consumer spending and sentiment, and headwinds from the strong US dollar posing risks to earnings.
US economic data released in May indicated that momentum in the economy had cooled. Employers hired at a robust clip in May, although job growth was the slowest since April 2001; nonfarm payrolls increased by 390,000, above consensus forecasts of 318,000, but down from 436,000 in April. Wage gains moderated as average hourly earnings growth eased to 5.2% annually, from 5.5%. The unemployment rate held at 3.6%. The four-week moving average for initial jobless claims continued to trend modestly higher, another sign that labor market conditions are beginning to soften. US retail sales slipped 0.3% in May — the first decline in five months, while nominal consumer spending increased at the slowest monthly pace this year, rising only 0.2% from a downwardly revised increase of 0.7% in April. The personal savings rate was near its lowest level since 2009, as high inflation strained household budgets and savings. Increasingly pessimistic views about inflation drove the Conference Board Consumer Confidence Index in June to its lowest level (98.7) in more than a year, although consumers maintained their spending plans for large-ticket items. The housing market continued to falter as demand was constrained by surging mortgage rates and still-elevated home prices. In May, construction of new homes fell to its lowest level in more than a year, and existing-home sales slid for the fourth straight month to a nearly two-year low. However, new-home sales rose for the first time in 2022. In June, homebuilder sentiment slipped to a two-year low.
Manufacturers remained broadly optimistic about their outlook, even as the Institute of Supply Management (ISM) Manufacturing Index registered a larger-than-expected decline to 53.0 in June. The report indicated that new orders contracted amid ongoing supply-chain constraints, input prices rose at a slower pace, and job growth cooled. In May, the ISM Services Index ebbed to 55.9 — the lowest since February 2021 but still firmly in expansionary territory. Price pressures remained prevalent and labor supply was tight, although there were signs that both were starting to ease. Preliminary data for June signaled a slowing expansion in the services sector amid a decline in new orders, a notable drop in backlogs, weaker job creation, and waning demand. Cost burdens also rose at a marked pace, but the rate of input price inflation eased notably from May. Small-business sentiment held near a two-year low as rising inflation and labor constraints impaired expectations for the economy and overall sentiment.
All 11 sectors in the S&P 500 Index (-8.3%) posted negative results. Energy (-16.8%) was the worst-performing sector as the price of oil retreated. Materials (-13.8%) also underperformed, led lower by the metals & mining (-19.0%) and chemicals (-13.6%) industries. Financials (-10.9%) fell, driven by the banks (-13.8%), diversified financial services (-13.6%), and capital markets (-7.8%) groups. Consumer staples (-2.5%) was the top-performing sector, with the beverages (-0.1%), household products (-1.5%), and food products (-1.8%) groups proving resilient in a challenging environment.
European equities (-7.7%) ended sharply lower as more aggressive central bank policy tightening, markedly slowing economic activity, surging energy prices, and mounting recession risks weakened the outlook for equities and earnings. June was dominated by a series of hawkish decisions by European central banks, including the first increase in interest rates (50 bps) by the Swiss National Bank in 15 years, accelerated policy tightening by Sweden’s Riksbank and Norway’s Norges Bank (50 bps), and the fifth consecutive rate hike (25 bps) by the Bank of England (BOE) since December. Annual headline inflation in the eurozone hit a record high of 8.6% in June after the European Central Bank (ECB) announced a series of contractionary measures. The ECB will end its remaining asset purchases on July 1 and indicated that it will raise rates by 25 bps in July and potentially by a larger amount in September unless there is a quick improvement in the inflation outlook. ECB President Christine Lagarde struck a hawkish tone, stating that “inflation pressures are broadening and intensifying” and that the bank is prepared to curb monetary policy more aggressively. It also agreed to apply special flexibility in its pandemic emergency purchase program (PEPP) and accelerate plans to create a tool to address financial fragmentation in the eurozone.
Eurozone manufacturing growth slid to a 22-month low as the eurozone manufacturing Purchasing Managers’ Index (PMI) dropped to 52.1 in June, from 54.6 in May. Output contracted for the first time in two years due to weaker demand, while new orders fell at the fastest pace since May 2020. The preliminary eurozone services PMI for June showed that growth in the services sector also slowed markedly. Eurozone consumer confidence fell just short of the all-time low set in April 2020 as soaring inflation weighed on consumers’ purchasing power, while industry confidence declined to a level rarely seen since the European debt crisis of 2012.
All eurozone countries registered negative performance in June, but Ireland (-14.6%), Austria (-12.9%), and Italy (-12.2%) were the biggest underperformers. European natural gas prices continued to skyrocket as supplies fell 60% from normal levels amid gas flow disruptions in the Nord Stream 1 pipeline, forcing European governments to scramble to build natural gas inventories ahead of the winter. Germany (-11.3%) triggered the second phase of its national gas emergency plan, bringing it one step closer to rationing gas to industry, while the Netherlands (-8.4%) and Austria indicated that coal-fired power plants could be used to compensate for reduced Russian gas supplies. In the UK (-5.2%), the BOE continued its preference for gradual, steady rate increases to balance inflation against recession risks, even as GDP declined 0.3% in April, far worse than predicted. Prime Minister Boris Johnson’s authority weakened after more than 40% of lawmakers in his Conservative Party voted no confidence in his leadership. In France (-8.1%), President Emmanuel Macron lost his majority in the National Assembly, creating significant obstacles to his domestic reform agenda.
Pacific Basin equities (-3.8%) declined, led lower by Australia (-8.2%). Australia’s central bank raised interest rates by a larger-than-expected 50 bps in response to intensifying inflation pressures from higher gas and electricity prices and disruptions in food supplies due to flooding. Job growth surged by 60,600 in May, far exceeding estimates of 25,000, while the unemployment rate held at 3.9% — the lowest since 1974.
The strong labor market improved the odds for another sizable rate hike in July, although the bank pushed back against speculation of a 75-bps rate hike in July, adding that it will closely monitor global economic developments, labor costs, and the impact of higher rates on consumer spending. Retail sales increased for the fifth consecutive month, rising 0.9% in May. This result was more than double forecasts and provided some confidence that consumers are coping with tighter financial conditions. However, rising inflation drove consumer sentiment down to 86.4 in June — the seventh straight monthly decline.
Singapore (-6.3%) ended sharply lower as a hefty 5.6% annual increase in inflation in May could force the central bank to raise interest rates before its next meeting in October. Factory output exceeded expectations, surging 13.8% year over year in May amid strong semiconductor sales, while the reopening of Asia’s economies boosted Singapore’s non-oil domestic exports by a greater-than-expected 12.4% annual pace. In New Zealand (-2.1%), surging inflation and surprisingly large rate hikes squeezed household budgets, drove consumer and business confidence sharply lower, and heightened the risk of a steep slowdown in demand.
Japan (-2.7%) finished the month lower. In sharp contrast to aggressive monetary policy tightening by most other global central banks, the BOJ maintained its massive stimulus program in hopes that it can support the country’s economic recovery and help the bank to achieve a sustainable 2% inflation rate. The core CPI rose at a stable 2.1% annual pace in May, matching expectations. Retail sales in May increased for the third consecutive month, rising 0.6% and bolstering the prospect that consumer spending, which accounts for more than half of economic output, could lead to an economic rebound in the second quarter. However, lackluster wage growth failed to keep pace with inflation, threatening to undermine a consumption-led economic recovery. The manufacturing PMI slipped to 52.7 in June, from 53.3 in May, as production was hampered by rising costs and persistent materials shortages, due in part to COVID restrictions in China. The preliminary services PMI for June expanded by the most since October 2013, thanks to a return of international travelers after COVID restrictions were lifted.
Emerging markets (EM) equities (-4.5%) moved lower in June. Within EM, Asia was the top-performing region, followed by Europe, the Middle East, and Africa (EMEA) and Latin America.
Asian equities (-3.1%) were led by strength in China (+6.7%). Chinese economic activity began to rebound after most high-profile lockdowns were eased in May, as the composite PMI rose above 50, indicating an expansionary environment for the manufacturing and services sectors. Additionally, China benefited from favorable trade dynamics as Russia’s isolated economy overtook Saudi Arabia to become China’s largest supplier of crude oil. President Xi Jinping reiterated that China would maintain its zero-COVID strategy, raising concerns about the durability and duration of the recent economic upturn. Inflationary headwinds weighed on the economic outlooks of Thailand (-5.4%), the Philippines (-9.3%), and South Korea (-12.9%). In Thailand, an uptick in tourism helped to offset the negative impacts of higher prices. The Bank of Thailand held interest rates steady, while the government announced an extension of price caps on many essential goods and services. The Philippine central bank increased rates in line with expectations. The country’s relatively gradual approach to lifting rates has pressured the peso, which fell to its lowest level versus the US dollar since 2005. South Korea’s inflation rate rose at the fastest pace in 14 years and the central bank opened the door to larger rate hikes, if necessary. Taiwan (-11.9%) fell amid increased geopolitical tensions with China and fears about economic hardship as global growth slows. India’s (-5.1%) central bank raised rates for a second straight month after inflation eclipsed the bank’s targeted range. Momentum in services and industrial output gathered pace, while the country’s trade deficit ballooned. Much like China, India was aided by steep discounts on imports of Russian oil.
In EMEA (-8.9%), close economic ties with Russia continued to weigh on the region’s equities. Poland (-8.3%), the Czech Republic (-6.3%), and Hungary (-0.2%) face difficult European Union voting and policy decisions amid broad-based inflationary pressures. Turkey (-8.4%) sold off amid plans to ease monetary policy in the face of rampant inflation. South Africa (-8.2%) combatted higher prices, while a decline in several key commodity spot prices reduced the exporting nation’s trade differential.
Latin American equities (-10.2%) fell sharply. Colombia (-21.5%) declined following a significant political shift as Gustavo Petro was named president-elect. Petro will become Colombia’s first leftist leader and intends to bring new regulations to big business, raise taxes, curtail the country’s oil and mining industries, and reestablish lost ties with neighboring nations. Political controversy weighed on Peru (-16.9%) and Brazil (-10.8%). In Peru, President Pedro Castillo was asked to resign from the Peru Libre Party after being accused of breaking up the party in Congress. Brazil’s President Jair Bolsonaro, who trails in the polls ahead of October’s election, announced that all federal gas and ethanol taxes will be removed until the end of the year, shifting the tax-receipts burden to the Treasury. Inflationary headwinds weighed on equities across Latin America, including Mexico (-7.7%) and Chile (-7.3%).
Fixed income spread sectors underperformed government bonds as spreads widened amid burgeoning recession fears, a gloomy growth outlook, and synchronized efforts by major central banks to counter global inflationary pressures.
US economic data releases softened. Confidence declined as consumers contended with soaring prices for energy, food, and homes. Retail sales slipped, led by automobiles, amid low inventory and the rising cost of loans. The trade deficit rose less than expected as exports rebounded. The labor market remained tight, though recession concerns began to surface as weekly jobless claims rose. The Manufacturing PMI declined due mainly to supply-chain disruptions and inflationary pressure. Industrial production grew tepidly as gains in mining and utility output were offset by weakness in factory activity. Durable goods orders edged higher for the third consecutive month. The housing market posted mixed results, as new-home sales increased in western and southern states, but existing-home sales fell amid surging mortgage rates and home prices. The eurozone’s manufacturing PMI fell as demand eased and inflation reached a new year-over-year high. Germany’s ongoing inflation and supply-chain pressures dragged down business sentiment and stoked recession fears. Inflation in the UK accelerated as food and energy prices continued to climb. China’s Caixin manufacturing PMI rose on improved supply and higher demand thanks to relaxed COVID constraints. Japan’s industrial production fell sharply on weaker vehicle production due to supply delays. Canada’s inflation approached a 40-year high amid soaring gas prices. Australia’s employers added more jobs than anticipated.
The Fed hiked rates by 75 bps and signaled the potential for a 75-bps increase in July. The Bank of Canada and the Reserve Bank of Australia increased rates by 50 bps. The ECB ended its quantitative easing program and indicated that it would lift interest rates by 25 bps in July. It also announced that it will design a new anti-fragmentation tool and apply flexibility to its PEPP reinvestments. The Swiss National Bank increased rates for the first time in 15 years. The BOE hiked rates by 25 bps and promised to act “forcefully” on inflation if needed. The Norges Bank lifted rates by 50 bps and revised its projected policy path higher. Sweden’s Riksbank raised rates by 50 bps and signaled further tightening as it increased both its inflation forecasts and policy-rate projections.
Most global sovereign yields rose even as recession risks mounted. It became clearer that persistent and higher-than-expected inflation will likely necessitate a more aggressive pace of rate hikes from major central banks. The US Treasury curve flattened, led by an increase in frontend yields, as markets rapidly priced in a quicker pace of Fed rate hikes after inflation rose to a 40-year high. Canadian front-end yields also increased sharply amid soaring inflation. European yields moved higher as ECB President Lagarde said a larger rate hike would be “appropriate” in September if inflation pressures persist. The BOJ doubled down on its yield curve control policy, buying a record amount of Japanese government bonds. The Bloomberg TIPS index generated a total return of -3.16%, and the 10-year breakeven inflation rate decreased by 31 bps to 2.34% during the month.
Global credit bonds underperformed duration-equivalent government bonds. Within the securitized sectors, agency mortgage-backed securities underperformed, while commercial mortgage-backed securities and asset-backed securities outperformed duration-equivalent government bonds. Within EM, local markets debt (-4.45%) outperformed external debt (-6.21%), in US-dollar terms. Spread widening detracted from results within external debt, and the movement of US Treasury yields also had a negative impact. The depreciation of EM currencies drove the negative performance in local markets, and movement in EM rates also hurt results.
The US dollar rallied versus most major currencies as hawkish Fed rhetoric, an aggressive increase in front-end US yields, and mounting concerns about a global recession buoyed the currency. The Swiss franc, which gained against the dollar, was a notable exception as the Swiss National Bank surprised markets with a rate hike, upgraded its inflation forecasts, and signaled greater tolerance for a stronger currency. The Japanese yen fell to its weakest level since 1998. The BOJ remained the outlier among major G10 central banks, electing to maintain accommodative monetary policy. The Norwegian krone declined in line with oil prices, even as notably high inflation raised expectations for more aggressive hikes from the Norges Bank. The euro fell earlier in the month as peripheral spreads widened in the absence of detailed plans by the ECB to tackle fragmentation risks. The risk-sensitive Swedish krona ended lower even though the Riksbank hiked rates. In EM, trade- and commodity-linked currencies endured the worst of the declines, particularly those in Latin American (Brazilian real, Colombian peso, Chilean peso), Asia (South Korean won), and EMEA (South African rand, Polish zloty), while the currencies of commodity-importing countries (Turkish lira, Indian rupee) outperformed.
Commodities (-7.6%) sold off sharply as investors grew increasingly concerned about the global economic outlook amid tighter monetary policy, sustained conflict between Russia and Ukraine, and recurring lockdowns in China. All four commodity sectors stumbled. Precious metals (-2.5%) declined for the third straight month as investors weighed slowing global growth against higher interest rates; gold (-2.1%) and silver (-6.5%) ended lower.
Energy (-6.6%) slumped for the first time since November. While heating oil (-0.2%) settled flat, gas oil (-3.3%) and crude oil (-4.7%) were not immune to broad risk-off sentiment. Gasoline (-5.7%) finished in negative territory as demand showed signs of softening just three weeks into peak driving season in the US. US natural gas (-33.3%) was the weakest performer; prices were volatile in the aftermath of an explosion at the Freeport export terminal, which forced more gas into US storage and fueled fears of oversupply.
Agriculture & livestock (-9.0%) ended sharply lower. Feeder cattle (+5.3%) and live cattle (+1.8%) were the only positive performers, buoyed by a report from the US Department of Agriculture that showed strong beef prices and an increase in estimated slaughter activity. In contrast, lean hogs (-3.5%) declined. In late June, soybeans (-3.4%) fell to their lowest level since January as inventories picked up. With crude oil trading lower, Brazilian mills may start diverting more of their sugar cane away from ethanol, weighing on sugar (-5.6%) prices. Coffee (-0.4%) finished flat, while cocoa (-7.7%) extended its losses amid persistent global demand uncertainty and a recent stretch of favorable growing conditions in West Africa. Corn (-12.1%) supplies stacked up outside of Brazilian silos at the fastest rate in years after the country’s biggest-producing region harvested a bumper crop. Cotton (-16.8%) fell over 30% from a decade high in early May on worries that soaring inflation will prompt consumers to spend less on clothing. Wheat (-19.4%) declined sharply as dry and hot weather accelerated early harvesting in the Northern Hemisphere, bringing an influx of grain onto a world market that is suffering from supply strains.
Industrial metals (-13.8%) was the weakest-performing sector as mounting anxiety about a potential US recession and ongoing concerns around China’s economic recovery weighed on demand. Aluminum (-12.2%) and lead (-12.3%) extended their losses from May, while copper sank below US$8,000 a ton — its lowest level since early 2021. Zinc (-19.0%) prices were the lowest since mid-December despite a new supply crisis brewing on the London Metal Exchange (LME) amid smaller stockpiles. Nickel (-20.1%) sold off sharply after hedge-fund manager Elliott Associates announced a legal suit against the LME for US$456 million following the suspension and cancellation of nickel trades in March.
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