Unexpected election results in India, Mexico and South Africa temporarily shook markets. In India, Narendra Modi secured a third term, but lost his parliamentary majority.
May has been a month for elections, with India, Mexico and South Africa all going to the polls. For India, early results indicate a continuation of the status quo, while in Mexico the first female president was elected by a landslide.
With US jobs growth remaining strong and inflation proving stickier than expected, speculation grew that the US Federal Reserve (Fed) would delay cutting rates until the end of 2024.
The Swiss National Bank (SNB) became the first major central bank to reduce interest rates this cycle. The SNB reduced rates by 25 basis points (bps) to 1.5%, its first cut in nine years, after Swiss inflation fell to 1.2% in February, marking the ninth consecutive month that prices have been within the 0-2% target range.
Hopes faded for interest rate cuts in March. While the US Federal Reserve and European Central Bank indicated that later rate reductions were possible, they stressed it was too early to consider such a move.
Central banks warned that financial markets might have become overly optimistic about the probability of rate cuts in the first quarter of this year, after headline inflation rates accelerated modestly in December followed by early indicators of economic activity strengthening in January.
The US Federal Reserve (Fed) pivoted to a more dovish stance, with Fed chair Jay Powell indicating that US rates were now “likely at or near” their peak for this rate-hiking cycle. US policymakers are now forecasting 75 basis points of rate cuts in 2024, with more to follow in 2025.
Inflation surprised on the downside. US inflation fell to 3.2% in October while early estimates showed eurozone inflation declined to 2.4% in November. UK inflation, recently stickier than most, slowed sharply to 4.6% in October, while the Chinese economy fell back into deflation with prices falling 0.2% year on year.
Central banks in developed markets reinforced the message that rates will need to stay high for some considerable time to bring inflation back to target, dashing hopes of substantial cuts next year. In contrast, Brazil cut rates for the second time this cycle, while Poland lowered borrowing costs for the first time in more than three years.
Central banks in developed markets reinforced the message that rates will need to stay high for some considerable time to bring inflation back to target, dashing hopes of substantial cuts next year. In contrast, Brazil cut rates for the second time this cycle, while Poland lowered borrowing costs for the first time in more than three years.
China’s economic activity remained under pressure. Exports tumbled 14.5% year on year in July, the steepest fall since the start of the pandemic, while imports fell 12.4% on a year-on-year basis.
After the pause in June, the US Federal Reserve (Fed) raised interest rates by 25 basis points in July, taking the federal funds rate to a range of 5.25-5.50%, a 22-year high.
The US Federal Reserve (Fed) paused its rate-hiking stance for the first time in 14 months as it waits to see how the significant hikes already implemented will feed through into the economy.
Semiconductor stocks surged as artificial intelligence (AI) and its applications became the focus of investor interest in May. Shares of NVIDIA surged as it raised its sales guidance significantly.
Fears of a banking crisis faded, with large US and European banks announcing sizeable first quarter profits. However, US investment bank JPMorgan Chase was forced into an emergency rescue of California-based regional lender First Republic Bank.
Financial markets were rocked by the collapse of two niche US lenders: crypto-focused Signature Bank and SVB Financial, the bank of choice for California-based start ups.
Tensions between the US and China rose after the US shot down a balloon, which it alleged that China was using for the purposes of espionage. The US also warned China against supplying Russia with weapons, saying it could risk escalating the war in Ukraine.
The headline rate of inflation continued to fall across most economies. US consumer prices rose at an annual rate of 6.5% for December, the lowest rate since October 2021, while headline eurozone inflation eased to 9.2% compared to a peak of 10.6% in October 2022.
China pivoted away from its zero-Covid policy, with the authorities refocusing on consumption and industries such as technology and property. Infection levels surged as testing and quarantine requirements were removed.
China might be easing its strict zero-Covid policy, following a month of widespread protests and a sharp slowdown in economic activity. Despite record high infection levels, there appears to have been a shift in emphasis recently.
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