Macro-economic news in May
Top Takeaways for May
Friday 2 June, 2023
Headlines in May were dominated by the US debt ceiling discussions, along with the surge in Artificial Intelligence (AI) related companies. Elsewhere, inflation appears to be more stubborn than previously thought, and the US earnings season drew to a close.
US debt ceiling
A deal around the US debt ceiling, which limits the amount the government can borrow, was deliberated over the weekend. Once passed through both Houses, this bipartisan effort will have averted a potential default on US debt, which could have had severe consequences for the national economy. Uncertainty around a US default grew throughout May, and this weighed on bond markets, but the weekend’s news shows that the finish line may be in sight.
Surge in AI activity
The rise in AI activity can be attributed to two main factors: the increasing availability of data and the decreasing cost of computing power. The watershed moment this year though, was the launch of ChatGPT, catapulting AI into the limelight. The share price of Nvidia, a prominent chipmaker, went parabolic in May after a bumper revenue forecast and its stock is now up around 170% YTD[1]. Other mega-cap companies, such as Alphabet, Microsoft and Amazon have seen their share prices surge in May off the back of the momentum behind AI. The growth trajectory suggests that AI will play an even more substantial role in transforming businesses and the global economy in the coming years.
US earnings season
In summary, despite initial concerns, this quarter's US earnings season was better than anticipated. Once again, it was the technology companies that drove overall growth. Furthermore, it appears that the market's pessimistic view towards consumer sectors, which are sensitive to economic fluctuations, may have been premature. In fact, some of the largest earnings beats in the index were observed in this sector. Despite uncertainties surrounding the debt ceiling negotiations, the S&P 500 which tracks the stock performance of 500 of the largest companies listed on stock exchanges in the US, experienced a modest, yet positive, growth since the unofficial start of the earnings season.
Inflation
Finally, inflation revealed itself to be a stubborn character in May. The US Personal Consumption Expenditures (PCE) figure came in above expectations – this is a key inflationary gauge that the Federal Reserve uses in setting interest rates. Prior to May, markets were anticipating interest rate cuts to commence in July. They now expect a further rate rise in June to combat the persisting inflationary pressures. The stories are similar elsewhere. The UK released higher-than-expected inflation figures in May and core Consumer Price Index (CPI), which excludes the volatile prices of food and energy, rose to its highest level since 1992. The reading added to fears that inflation is becoming entrenched, which led investors to rapidly dial up their expectations for rate hikes from the Bank of England.
[1] Factset as at 30/05/2023
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