The U.S. stock markets experienced divergent trends last week. The Nasdaq Composite hit new records, driven by the technology sector's strength, particularly NVIDIA's impressive earnings report. NVIDIA, now the third-largest company in the S&P 500, significantly influenced market sentiment, contributing to 25% of the S&P 500’s gains year-to-date. Despite this, the Dow Jones Industrial Average recorded its largest weekly loss since early April, dropping by 2.33%. The broader S&P 500 Index remained flat, and small-cap stocks declined, highlighting the varied market performance.
Investor concerns about inflation resurfaced following strong economic data. S&P Global reported a rise in its composite index of business activity to 54.4 in May, its highest in over two years, suggesting robust economic growth. This fueled speculation that the Federal Reserve might delay interest rate cuts, causing a broad market sell-off. Manufacturing activity showed modest improvement, but the services sector saw significant acceleration. Inflationary pressures, especially in manufacturing, contributed to a cautious market outlook.
Durable goods orders, excluding aircraft and defense, rose 0.3% in April, indicating a potential pickup in business investment. However, the housing market showed weakness with lower-than-expected sales of existing and new homes. Bond markets reacted to these developments, with longer-term yields rising and a reduction in expectations for multiple Fed rate cuts this year. Municipal bond yields increased due to heavy issuance and outflows, while investment-grade corporate bonds remained stable.
European markets had a mixed week, with the pan-European STOXX Europe 600 Index declining by 0.45%. Major indexes showed varied performance: Italy’s FTSE MIB fell 2.57%, France’s CAC 40 declined 0.89%, Germany’s DAX was nearly unchanged, and the UK’s FTSE 100 slid 1.22%. Investor sentiment was influenced by inflation data and interest rate expectations.
In the UK, inflation slowed to 2.3% in April from 3.2% in March, the lowest in nearly three years. However, the deceleration was less than expected, causing markets to scale back expectations of multiple rate cuts by the Bank of England (BoE). Core inflation, excluding volatile energy and food prices, remained high at 3.9%, further dampening hopes for significant monetary easing.
The Eurozone saw stronger-than-expected economic activity, with the composite purchasing managers’ index (PMI) rising to a 12-month high of 52.3 in May, driven by robust services activity. However, manufacturing PMI remained in contraction for the 14th consecutive month. Negotiated wages in the Eurozone increased by 4.7% year-over-year in Q1 2024, with the European Central Bank (ECB) expecting continued wage growth, although at a decelerated pace.
ECB President Christine Lagarde indicated a "strong likelihood" of a rate cut in June, depending on incoming data supporting the ECB’s 2% inflation target. This cautious stance reflects the delicate balance between managing inflation and supporting economic growth.
Japanese equities ended the week lower, with the Nikkei 225 down 0.36% and the broader TOPIX Index slightly declining. Positive economic data and strong earnings from NVIDIA initially boosted Japanese tech stocks, but overall gains were reversed by week’s end as concerns over U.S. interest rates affected market sentiment. Japanese bond yields reached a significant milestone, with 10-year government bond yields hitting 1.0% for the first time in 11 years, reflecting the Bank of Japan's (BoJ) recent hawkish tone.
Economic indicators in Japan showed signs of improvement. The manufacturing PMI rose to 50.5 in May, indicating expansion for the first time in over a year, while the services PMI remained robust, although slightly down from April. The BoJ’s efforts to normalize the bond market and address the yen's prolonged weakness continue to be a focus, with potential impacts on inflation and wage growth.
In China, stocks fell as concerns over U.S. interest rates overshadowed Beijing's measures to support the property sector. The Shanghai Composite Index and the blue-chip CSI 300 both declined by over 2%, while Hong Kong’s Hang Seng Index dropped nearly 5%. The People’s
Bank of China (PBOC) announced significant support for the struggling property market, including a re-lending program and lower mortgage rates. However, skepticism remains about the effectiveness of these measures in resolving the ongoing housing crisis.
Overall, last week highlighted the complex interplay between economic data, inflationary pressures, and central bank policies across major global markets. Investors remain cautious, navigating a landscape marked by mixed signals and shifting expectations.
