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• In May, markets traded with little conviction as investors evaluated developments surrounding the debt ceiling negotiations, while ongoing signs of deterioration in China’s recovery hurt Asian markets. Additionally, investors faced challenges due to slowing growth in Europe and uncertainty surrounding the future path of monetary policy in the US. With significant uncertainty in markets at this point, most major indices ended May lower and struggled for direction. The Morgan Stanley Capital International (MSCI) All Country World index finished May down 1.3%. Both developed and emerging markets also ended in the red, with the MSCI World and Emerging Markets indexes down 1.3% and 1.9%, respectively.

• All eyes have been on the ongoing standoff between Republicans and Democrats in the US regarding the impending debt ceiling negotiations. Investors have been rightfully concerned, as estimates suggest that the Treasury could exhaust its funds by the beginning of June, highlighting the urgency to reach an agreement and avoid default. Fortunately, market sentiment was boosted by news that a majority of the US House of Representatives voted to approve the bill aimed at suspending the government’s debt ceiling. The backing from both Democrats and Republicans has instilled confidence that the bill can pass through the Senate in time to avoid any default.

• The US labour market remains persistently tight, as indicated by the latest non-farm payrolls report, which showed that the economy added 253 000 jobs in April, while the unemployment rate fell to 3.4%. The services sector also grew for the fourth consecutive month in April, buoyed by an increase in new orders and ongoing improvements in supply logistics. Factory activity, on the other hand, continues to contract as higher borrowing costs and tightening credit conditions hit demand.

• On the inflation front, the April CPI report showed that headline and core consumer prices fell to 4.9% and 5.5% year-over-year, respectively. While promising, the Federal Reserve’s preferred measure of inflation, Personal Consumption Expenditures (PCE), surprised to the upside in April. The headline PCE index jumped to 4.4%, significantly higher than the estimated decrease to 3.9%. The PCE report has fuelled speculation that the Federal Reserve will raise rates by another 25 basis points at their next meeting in June, with futures markets pricing in a 66.4% probability.

• The enthusiasm surrounding China’s economic reopening is fading as weak factory activity data provides more evidence that its recovery is starting to falter. The latest report showed that China’s manufacturing PMI fell to 48.2 in May, well below expectations, highlighting the impact of weakening demand. The service sector also underperformed, with growth slowing to its lowest pace in four months. The deterioration in activity has put downward pressure on Asian markets and may also force policymakers to implement measures to boost the economy.

• The UK economy has performed better than many predicted this year, leading the IMF to revise its 2023 GDP growth forecast to 0.4%, an improvement from the expected 0.6% contraction projected at the beginning of the year. While the economy is hanging on, inflation is also remaining at elevated levels. The latest report showed annual CPI at 8.7%, surpassing expectations of 8.3%, while core CPI increased to 6.8% from 6.2%. With pricing pressure showing no signs of abating, it is likely that the Bank of England will raise rates once again in June. Consequently, the combination of rising rates and negative real wage growth will exert increasing pressure on both businesses and consumers in the coming months.

• Locally, weak economic growth, ongoing load shedding, and reports that South Africa may have supplied weapons to Russia for the war in Ukraine, have sent the rand to record low levels. On top of this, a resurgence in dollar strength has also weighed on the rand, pushing it to hit a high of R19.83 against the greenback. The rand has also lost ground against the pound and euro to trade at R24.50 and R21.16, respectively.

• On the data front, South Africa’s CPI report pointed to a modest slowdown in inflationary pressures. The headline CPI declined to 6.8% from 7.1%, while the core CPI remained unchanged at 5.3%. Despite this slight improvement, the South African Reserve Bank still raised rates by 50 basis points to defend against currency devaluation. The monetary policy committee also signalled that they have entered restrictive territory, suggesting a potential pause in rate hikes for the time being.

• South African equities have come under pressure with the JSE All Share index losing 3.9% in May. All sectors ended down, with financials, industrials, and resources falling 8.2%, 3.1%, and 2.2%, respectively. South African listed property also slumped and ended May down 6.3%.

• One-month index movements:
  • JSE All Share Index: -3.94%
  • S&P 500 Index (US): 0.25%
  • FTSE 100 Index (UK): -5.39%
  • Hang Seng Index (Hong Kong): -8.35%