Expectations for the month of May were set low for the U.S. economy, but even with all the volatility during the month, the U.S. economy appeared to come out stronger.
23.06.2023 | 06:05 Uhr
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As the banking turmoil from March entered the rearview mirror, all eyes turned to the U.S. debt ceiling. Once a deal became imminent, that uncertainty subsided and all eyes turned back to the economic data. The U.S. did not disappoint, further pushing off to the future recession and Fed rate cuts.
Coming into May, the scene was set for a weakening U.S. economy relative to the Euro-area and China, but economic and labour market data came in stronger than expected. Employment data surprised to the upside for the 13th month in a row (only to be surpassed with data released in early June). Other labour market data prints, including JOLTS, ADP and initial jobless claims, were also on the stronger side. In Europe, the markets were confronted with downside surprises in both headline and core inflation and slowing growth expectations. In China, data also came in weaker than expected, disappointing China bulls, with May PMIs confirming the economy’s weakness and the economy showing a continued drag from the property sector.
Developed market central banks continued to raise policy rates to fight recalcitrant inflation. This drove global yields materially higher, with the 10-year U.S. Treasury up 22 basis points (bps), and credit spreads wider. Stronger U.S. data, a somewhat hawkish Fed and lower than expected eurozone inflation supported U.S. dollar strength, reversing course from the first quarter. Credit markets are still worried about tighter lending conditions due to the U.S. regional banking problems, with the Fed’s senior loan survey showing recession-like conditions. By the end of the month, however, sentiment did improve, tightening spreads from their intra-month wides. The U.S. agency mortgage market continued to experience wider spreads as the spectre of bank and Fed selling hurt confidence. The stronger U.S. economy and more hawkish Fed also negatively impacted Emerging Market Debt (EMD) as the U.S. dollar outperformed most EM currencies.