Fresh turbulence in U.S. banks and debt ceiling woes in Washington suggest recent stability in world markets will most certainly be put to the test in May.
The latest U.S. and Chinese inflation numbers and a Bank of England interest rate decision are among the calendar highlights meanwhile.
Here’s a look at the week ahead in markets:
COOLING DOWN
A worker scans onions, limes, and other produce inside the Walmart Supercenter in North Bergen, N.J., on Feb. 9.Eduardo Munoz Alvarez/The Associated Press
Any cooling down in Wednesday’s April U.S. inflation data should give investors comfort that the Federal Reserve is done with tightening after more than a year of dramatic rate increases to contain price pressures.
After all, the Fed has just signalled a pause after delivering a 10th straight rate increase.
Economists polled by Reuters expect a 0.4 per cent rise in consumer prices. A sharper-than-expected slowdown could vindicate those betting on rate cuts later this year, giving a further tailwind to risk assets – including an equity rally that has seen the S&P 500 gain 5.8 per cent year-to-date.
A strong reading, on the other hand, would support the case for the Fed to keep rates higher for longer and feed into market fears over stagflation – a mix of high inflation and low growth that is detrimental to risk assets.
CHINA CHECK
Cranes and shipping containers are seen at Lianyungang port in China's eastern Jiangsu province on April 13.STR/AFP/Getty Images
A raft of Chinese data will likely offer a reality check on March’s upside surprises.
April trade figures on Tuesday are likely to show a cooling of March’s export surge. The services component of the price data can gauge demand, but consumer and producer price data broadly paint a picture of deflation. April inflation data is out Thursday.
Together with credit data – seen chugging along without being outstanding – it’s a complicated picture for investors and the People’s Bank of China to navigate. Indeed, news that China’s manufacturing activity unexpectedly shrank in April has raised pressure on policymakers to boost an economy struggling for a postCOVID lift-off amid subdued global demand and persistent property weakness.
And flows figures suggest foreign money is staying away, for now.
THE CROWN
People stand on The Mall, ahead of the coronation of Britain's King Charles and Camilla, Queen Consort, in London, on May 5.KEVIN COOMBS/Reuters
King Charles’ coronation may provide a temporary bump for U.K. businesses with households expected to buy extra groceries as well as coronation memorabilia for an extended weekend.
Investors are more focused on the economy stagnating, with latest U.K. GDP data out on May 12.
A day earlier, the Bank of England is likely to lift interest rates again to battle inflation – even as rising mortgage costs increase financial stability risks.
At 10.1 per cent, U.K. inflation is the highest in Western Europe. Energy prices are likely to stop soaring this summer, helping annual inflation comparisons. But lengthy health service waiting lists causing long-term sickness have exacerbated a worker shortage linked to Brexit, keeping wage rises high.
Money markets price a more than 70-per-cent chance of the BoE raising its main rate to 4.5 per cent on May 11 and taking it to 5 per cent by year-end.
SELL IN MAY
Traders react as Federal Reserve Chair Jerome Powell is seen delivering remarks on a screen, on the floor of the New York Stock Exchange on May 3.BRENDAN MCDERMID/Reuters
Conventional wisdom has it that May is the ideal point to take profit on equities and lay low until later in the year.
“Sell in May and go away” is based on the premise that the best six-month period of the year for stock market returns is November to April, while the leanest is May to October. Over the last 50 years, the S&P 500 has gained an average of 4.8 per cent between November and April, and just 1.2 per cent between May and October, according to Reuters calculations.
However, this pattern fades over a shorter time frame.
Over the last 20 years, the out-performance of November-April over May-October narrows to 1 per cent. Over 10 years, November-April has underperformed May-October by 1 percentage point and over the last five years, it’s underperformed by 3 percentage points. It might be time to find words that rhyme with “November.”
DEBT AND DISTRESS
The first working session of G-7 foreign ministers in Muenster, Germany, on Nov. 3, 2022.WOLFGANG RATTAY/Reuters
Bulging debt burdens and distress woes in emerging markets are high on the agenda when finance ministers and central bankers from G7 advanced countries meet in the Japanese city of Niigata May 11-13. The group has invited a number of policy makers from emerging economies such as India, Indonesia, South Korea, Singapore and Brazil to attend an outreach meeting.
But that’s not the only burning issue for the gathering under the Japanese presidency that will also look to address spillover effects of Russia’s war against Ukraine and sanctions against Moscow as well as global inflation and supply chain pressures.
Financial stability could also become a key topic as tremors from a fresh flare up in U.S. banks ripple across markets after First Republic Bank became the third lender to collapse since February.
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