Weekly Commentary: 15 May 2023 – 21 May 2023
Various major benchmarks ended lower last week as concerns about US regional banking risks and developments on the ongoing US debt ceiling negotiations impinged on overall investor sentiments. With little progress made during the previous round of discussion and last Friday’s debt limit meeting postponed into this week, markets generally were tentative despite mid-week economic data releases indicating a softening in both consumer and wholesale prices and an initial unemployment claim count that came in above consensus forecast. For the month of April 2023, headline CPI decelerated by 0.1% to 4.9% YoY and headline PPI slowing by 0.4% to 2.3% YoY from the month prior. Initial jobless claims also came in at 264k above the surveyed expectations of 245k. The softer consumption sentiment was evidenced from the pullback in the University of Michigan Sentiment Index where the reading for May 2023 fell to 57.7 against the 63.5 recorded for April 2023. However, we still recognise that the domestic labour markets are still resilient as the April non-farm payrolls showed 253,000 jobs were added, the best gain since January while the unemployment rate fell to 3.4%, matching the lowest reading since 1969. Tight labour markets are expected to sustain an upside pressure on wages, which grew 4.4% in April from a year earlier, up slightly from a 4.3% annual increase in March.
Elsewhere, the ECB increased its key rate by a quarter percentage point, to 3.25%, a nearly 15-year high. Expectations on the streets are expecting the ECB to continue raising rates over the coming months, even as the US Federal Reserve signaled their inclination to pause policy rates at existing levels should the current trajectory of price declines be sustained.
Stock returns were mixed across the following 3 indices, with weekly returns being negative for the Dow Jones Industrial Average (-1.04%) and the S&P 500 Index (-0.24%), whereas the NASDAQ Composite Index (0.44%) was positive across the period. This was essentially the second consecutive weekly decline for the Dow Jones Industrial Average and the S&P 500. Other key market indices generally generated negative returns such as the Hang Seng Index (-2.00%), MSCI Singapore (+0.10%), and MSCI AC ASEAN Index (-0.80%). 3 S&P 500 sectors registered positive returns last week – Communication Services (+4.34%), Consumer Discretionary (+0.63%), and Consumer Staples (+0.01%). The main underperformers for the week were from subsectors such as Energy (-2.14%), Materials (-1.96%), and Financials (-1.29%). For 2022 as a whole, index returns were negative for the Dow Jones Industrial Average (-8.78%), S&P 500 (-19.44%), and the NASDAQ Composite (-33.10%).
The yield-curve remains inverted as the 10Y-2Y US Treasury spread widens 3bps to -0.52%, driven by U.S 2-year and 10-year Treasury yields falling 0 bps to 3.99% and 3 bps to 3.48% respectively. Market sentiment also became more risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened 7bps to 3.26% while the CBOE Volatility Index (VIX) was 5bps higher at 17.03%.
In this coming week, President Joe Biden will be meeting House speaker Kevin McCarthy and other top congressional leaders on Tuesday to finalise the outline of a deal in order to ensure that a prospective bill could be passed through Congress on 1 June 2023. Some of the key economic data expected to be released this week include US retail sales and Industrial Production.
The global REIT market’s return was generally soft across the numerous benchmarks. The Hang Seng REIT Index ( -4.40%), FTSE EPRA NAREIT UK REIT Index (-3.72%), and the FTSE EPRA NAREIT France Index (-3.55%) were the notable REITs that generated negative returns over the past week. Closer to home, the iEdge S-REIT Index (-1.23%) and all of its subsectors were largely lower for the week with Office (-3.99%) and Specialized (Pureplay Data Centers) underperforming subsector peers. REITs generally have been affected by decreasing yield spread as interest rates surged and investors price in the possibility of reduced distributions stemming from higher financing costs. However, we do expect inflows to return to the sector given the existing attractive valuations on offer and resilience offered by the REIT asset class in light of the waning global growth outlook.
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