Market Update

Our previously contrarian view that central banks need not aggressively raise interest rates is gaining traction as global economic growth exhibits signs of deceleration.
Disappointing PMI data releases in both the US and the UK underscore this trend. The UK's composite PMI reading for May plummeted to 51.8, down from April's 58.2 and well below economists' expectations of 56.5. While it remains just above the pivotal 50 threshold that separates expansion from contraction, this sharp deterioration underscores our warning that the UK's economy cannot endure aggressive monetary tightening.
Similarly, the US composite PMI data reflects an economic slowdown, with a reading of 53.8 for May compared to April's 56.0 and an economist consensus of 55.7.
In addition, April's US new home sales data disappointed, coming in at 591,000, well below the anticipated 748,000 and March's 763,000 figure.
The release of the minutes from the last Federal Reserve (Fed) monetary policy meeting held on May 4, 2022, suggests that policymakers might increase US interest rates by 0.5% at their next two meetings, scheduled for June 15, 2022, and July 27, 2022. However, there is a strong likelihood that they will then pause. It appears that Fed policymakers may have recognized that inflationary pressures have not only peaked but are also beginning to negatively affect demand. Aggressively hiking interest rates in such a scenario could risk triggering a recession.
Consequently, financial markets have begun to dial back their expectations for future interest rate hikes, as reflected in the accompanying table. This development has had a positive impact on global equity markets.
Similarly, in the UK, we had previously argued that the inflationary squeeze would erode consumer confidence and spending, potentially halting the Bank of England's (BoE) interest rate increases. However, a support package announced by Chancellor of the Exchequer Rishi Sunak on May 26, 2022, has forced us to revise our view. Unfortunately, what Sunak provides, the BoE is likely to offset. This support package strengthens the UK economy's resilience and is expected to push UK inflation higher, increasing the likelihood of further interest rate hikes by BoE policymakers.
Looking ahead to the upcoming week, US markets will be closed on Monday, May 30, 2022, for Memorial Day, and UK markets will be closed on Thursday and Friday for the Queen's Platinum Jubilee celebrations. Consequently, it will be a relatively quiet week for economic data releases. Of particular interest to us will be US consumer confidence, ISM data, employment data (including non-farm payrolls, the unemployment rate, participation rate, and average earnings), Eurozone CPI, Chinese PMI figures, Japanese unemployment data, and Japanese industrial production.