In our Market Update for the month of May 2023, you will find current developments on the financial markets and an assessment of current events. Our aim is to give you an overview of the latest developments in the global financial markets.
Contents
Key interest rates and inflation
At the beginning of May, the U.S. Federal Reserve decided to raise the key interest rate by another 25 basis points. This was in line with the expectations of market participants. What was received as very positive, however, was the fact that the Fed held out the prospect of an interest rate pause in June. Given the disinflationary trend and the instability of the U.S. regional banks, it would seem to make perfect sense to put the brakes on a bit and wait to see the effects of the high interest rate level.
For April, U.S. inflation continued to decline, with the core rate still at a high level of 5.52%. The U.S. labor market was surprisingly robust and consumers also continue to seem to know nothing of a recession, as retail sales, after two months of decline, also rose again in April. Currently, it is expected that the FED will not raise interest rates in June, but it is quite possible that this will be made up for in July.
Reading tip: Factor Risk Premia: Value, Momentum, Size, and Quality
Raising the debt ceiling in the USA
The big topic this month was the controversy over raising the debt ceiling in the US. As has been the case several times before, the decision was used by Republicans and Democrats to blame the other party for the plight.
The threat of default weighed on the stock markets and the prices of short-dated US Treasuries also fell. At the end of May, a compromise was finally reached, which was approved by the U.S. Senate at the beginning of June.
Interest rates and inflation in the euro zone
The picture in the euro zone is similar: a declining trend in inflation with robust core inflation data, a robust labor market and improved retail sales. However, economic indicators such as the Purchasing Managers Index and the business climate are becoming increasingly gloomy.
The ECB also raised interest rates by a further 0.25% in May, which represents a clear reduction in aggressiveness after previous increases of 0.75% and 0.5%. Unlike the Fed, however, the ECB made it clear that it was not planning to pause interest rates.
Inflation in Switzerland
In Switzerland, inflation fell to a comfortable 2.6% for the month of April, which is only slightly higher than the general target of 2%. Nevertheless, the SNB recently made it clear that further interest rate hikes are not ruled out.
In Switzerland, economic indicators also clouded over slightly, although the unemployment rate is lower than it has been for more than 10 years.
Reading tip: Market review 2022 and outlook 2023
Trend: Artificial intelligence
Another important topic is the stock indices in the U.S., which are currently driven by one topic in particular: Artificial Intelligence. The big tech giants like Nvidia, Apple, Google, Meta and Microsoft are driving indices like the S&P 500 and Nasdaq, due to the great potential seen here in the field of AI. According to an article from Nasdaq.com, 10 stocks are responsible for over 80% of US index profits.
This is referred to as narrow market breadth, where a few companies are responsible for the majority of the market movement. This is because, as can be seen on the chart above, more than half of the companies have negative performance. As a result, even the broad-based S&P 500 can no longer be considered representative of the U.S. equity market. However, this fact has not yet entered the perception of many investors in this way. We consider this development to be extremely alarming and continue to focus on well-diversified portfolios.
