Summary
We believe that US economic growth momentum will likely continue to decelerate, as consumer spending eventually slows on the back of dwindling excess pandemic savings, decelerating wage growth, and tighter lending standards.
Market update
Equities: Equities performed well in May supported by on-going positive economic sentiment and a moderate softening in US inflation. Generally robust corporate earnings reports and central bank interest rate decisions continued to be key drivers of investor sentiment, although no notable rate cuts were announced during the month. US equities posted a 4.8% gain, driven by exceptional corporate earnings; European equities gained 5.0%. Emerging Markets (EM) increased 0.6%, while the Asia Pacific ex Japan markets rose by 1.9% in USD terms. ASEAN markets underperformed compared to the broader Asian region and EM.
Fixed Income: In May, the yield on two-year US Treasury decreased by 15 basis points to 4.89%, while the yield on ten-year US Treasury dropped by 18 basis points to 4.51%. In Singapore, SGD bond yields decreased in step with their US counterparts. Yields on two- and ten-year Singapore Government Securities dropped by 8 basis points and 9 basis points, closing at 3.42% and 3.36%, respectively. Amid a backdrop of generally falling yields, global aggregate bonds rose by 1.3%, US Treasury bonds returned 1.5%, and Singapore bonds (7-10Y) rose by 1.8%. The US high yield bond market returned 1.1%, underperforming its US corporate counterpart (1.9%). The Asian USD bond market returned 1.3%.
Macro overview
Growth: The J.P. Morgan Global Manufacturing Purchasing Managers Index (PMI) expanded for the fourth consecutive month in May with a reading of 50.9, a 22-month high, suggesting that global manufacturing output growth continues to improve. Despite overall tighter monetary conditions across most advanced economies, global economic activity in 2024 has been stronger than expected, supported primarily by US demand. Looking ahead, we believe that US economic growth momentum will likely continue to decelerate, as consumer spending, a key driver of US growth, eventually slows on the back of dwindling excess pandemic savings, decelerating wage growth, and tighter lending standards, among other factors.
Inflation: Although the US Consumer Price Index (CPI) displayed robust readings during Q1 2024, the back-to-back readings in April and May were below expectations, providing a temporary relief. However, over the last three months, shelter costs have been resilient, with the rents and owners' equivalent rents components both holding steady. While supply-side inflation risks could arise due to geopolitical tensions, leading to higher shipping costs or oil prices, we believe that disinflationary forces will ultimately prevail, especially as the labour market demand moderates over time.
Monetary Policy: At the June 2024 FOMC meeting, the Fed left the Fed Funds target rate unchanged at 5.25% to 5.50%, for the seventh consecutive time. The latest Fed median projection (aka ‘Dot Plot’) now implies a single 25 basis points (bp) rate cut this year, in contrast to three cuts projected in March. Going forward, the Fed will rely on data to guide its approach towards lowering rates.
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