May 2022

May 2022

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Central banks remained in focus in May as inflationary pressures remain elevated across the world. The US Federal Reserve hiked interest rates by 50bps in May, the largest hike since 2000. Fed Chair Jerome Powell signalled hikes at the following two meetings of a similar magnitude, which was corroborated by the committee’s meeting minutes released later in the month. The Bank of England (BoE) increased interest rates by 25bp, its fourth consecutive hike. Other monetary policy makers were even more hawkish, with countries such as Poland, hiking interest rates by 75bps. 

US inflation appears to have peaked at a multi decade high of 8,5% in March, although pricing pressures remained high in subsequent prints. In contrast, the figures in Europe and the UK continue to climb, echoes of a later reopening but also the cost of the ongoing conflict in the region. Eurozone inflation for May climbed to a new high at 8,1%, exceeding expectations, while inflation in the UK printed at 9,0%, a 40 year high. Preliminary inflation numbers for German inflation came in at 7,9%, the highest since the mid-1970s. 

High food and energy prices remain two of the biggest drivers of high inflation figures, with the war between Russia-Ukraine and pandemic restrictions in China keeping pricing pressure elevated. With tight supply, any decline in stock matters greatly. Oil and wheat prices rose over the month. Wheat futures prices took another leg up when India announced a ban on wheat exports, after a heatwave decreased expectations for the estimated domestic harvest size. Extending sanctions, the European Union announced a ban on all seaborne imports of Russian oil, which accounts for roughly two thirds of the region’s oil imports and raises the risk of a supply response from Russia, either in oil or gas. 

With this backdrop, markets climbed a wall of worry about the likelihood of a recession in the face of rising prices and interest rates. Lockdown restrictions and a challenged property sector in China, added to concerns and weighed on related commodity prices over the month. Weak economic data from China, especially gauges of fixed asset investment and domestic demand, laid bare the devastating economic impact from lockdown restrictions. Authorities have rolled out policy measures to help stabilise the economy, but these have created little positive momentum thus far. This included easing of monetary policy, in stark contrast to the rest of the world. News of an easing of restrictions in Shanghai towards month end, however, should bode well for an improvement in activity as well as supply and logistical challenges. 

Despite the elevated volatility and further downdrafts, markets recovered to end the month flat. The S&P 500 reached official bear markets territory in May, with a decline of more than 20% from the highs in January, but recovered to close the month out at a meagre gain of 0,2%, while the technology heavy Nasdaq 100 declined by 1,5%. European indices and Emerging Markets benefitted from a weaker US dollar and the recovery in local Chinese equity markets, with the Hang Seng gaining 2,2% over the month. The MSCI Emerging Markets Index gained 0,5% while the MSCI World Index gained 0,2%, largely flat over the month and leaving returns over the year to date and 12 months in negative territory. 


Global bond market volatility was elevated but subsided towards month end. The US 10-year bond yield peaked at 3,1%, after which yields trended down, supporting a positive turn for US Treasuries, emerging market debt as well as some corporate credit categories. In US dollar terms, the Bloomberg Global Aggregate Bond Index gained by 0,3% in May. 


Curbing inflation without causing a recession, often referred to as a “soft landing”, is the holy grail for central banks. Unfortunately, it is seldom achieved. Consumer spending, especially in the US, still benefits from stimulus checks, but this will not last forever and policy makers know this. In the same way they know fighting supply side inflation is a tough battle. It seems more likely investors should prepare for a bumpy glidepath. 




The second quarter seems set to be much tougher for growth dynamics. Incoming economic releases for April deteriorated on the back of the disruption and damage from the flooding in KwaZulu Natal and persistent loadshedding. Strikes and wage negotiations grabbed headlines, with above inflation demands. While there was some resolution in the platinum sector, the broader industrial action, especially in the gold sector, continues and is likely to weigh on mining output. 

With energy availability from Eskom still suboptimal, it was constructive to note that the first two private projects for generation below 100MW was approved in May, both solar, marking a milestone in energy reforms and better prospects. The National Prosecuting Authority (NPA) made some high-profile arrests in May, a step forward in the journey to accountability. Consumers received some reprieve from the meaningful increase in fuel prices at the start of June, with an extension of the reduction in the fuel levy for another two months. Credit ratings agency, S&P, upgraded the outlook for South Africa’s credit rating to positive from stable, a surprise move that reflects an improved fiscal outlook. 

Headline inflation printed 5,9% y-o-y in April, reflecting high fuel and food prices. Producer price inflation painted a grimmer picture, exceeding market expectations with a 13,1% increase over the year. Food producers, such as Tiger Brands have cautioned that input costs will increasingly be passed on to the consumer. With the outlook for inflation worsening since the March meeting, the South African Reserve Bank (SARB) increased interest rates by 50bps. Four members voted in favour of a 50bps hike and one in favour of a 25bps hike, underscoring a hawkish stance akin to global peers. Global market volatility weighed on the local bond market and the currency, but declining global bond yields and a weaker US Dollar allowed some strength to return into month end. The All Bond Index gained 1,0% in May and the Rand appreciated by circa 1,2% against the US dollar. Local equity markets were largely flat, with variation between the different headline indices. The FTSE/JSE All Share Index edged down 0,4%, while the FTSE/JSE Capped SWIX 40 gained 1,1%, in part due to the representation of luxury retailer Richemont, which saw a price decline of 8,4% over the month.