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Insights & Education

May 2023 Monthly Commentary

Updated: Mar 6

May 2023 Monthly Commentary

May Market Review


Fiscal policy drove the bond market last month, AI drove equity markets. After an expected early month Fed rate hike (to 5%-5.25%), global markets were fixated on the US debt ceiling. Short term interest rates (including T-bills) had a tumultuous month, as investors focused on Treasury Secretary Yellen’s early June “x-date” of US solvency. Wall street’s new probability game last month:  the ability of Congress to negotiate raising the debt ceiling/budget cuts to avoid calamity once again. The political theater subsided on month end, and both parties rejoiced on their efforts to avoid a US default. It was just slightly better than the 2011 “re-make”.


May equity markets felt like an exaggerated portrait of 2023 to date.  Big tech once again ruled, and the crowning of Nvidia as an “AI powerhouse” (after their 5/24th earnings) assisted. The AI leader posted better than expected forecast for Q2, highlighting significant demand for all products in their data center business, and the high demand for AI across business segments. This helped swing the Nasdaq to strong positive returns in May, jumping 5.93%.  The SPX rose just 0.43% as historically defensive sectors fell (questioning a hard landing or landing of any kind). The DJIA fell 3.17%, as energy stocks fell over 10%. Materials and utilities also fell over 6% for the month. Tech, communication services, and consumer discretionary represented positive sectors (+9.29%, +6.21%, +3.09%). The tech rebound was enough to offset negative days driven by sticky inflation data and congressional discord.


Interest rates rose during the month as speculation that a FOMC rate hike pause could be temporary, and current economic data suggests slower economic growth may be pushed off. Despite higher rates, the curve went back to a sharper inversion during the period, as short rates rose much more than longer tenor bonds. Two-year treasury notes rose 40 basis points to end the month at 4.405% yield. Ten-year notes increased 22 basis points to a yield of 3.65%.


Possibly the biggest story during the month was in short term T-bills.  While 3 month-1yr bills rose 35-43 basis points in anticipation of more Fed action, 1-month bills rose over 100 basis points, as fear of a treasury default gripped ultra short tenors. At one point, June bills reached over 7%, and were moving 100 basis points in a trading session, as “run out of money day” approached. The pinnacle of the volatility arrived around May 24th, as rating agency (Fitch) warned of a U.S. debt down grade. It was a less poignant warning than S&P’s 2011 warning, but still moved short rates, as “political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date…” The House of Representatives and the President reached a negotiated agreement over Memorial Day weekend, and markets found solid footing into the beginning of June.


Credit sectors, including both high yield and investment grade, saw prices fall during May. Industrials and utility credits saw slightly wider risk premium spreads, while financial spreads fell versus risk free rates. Securitized bonds also outperformed treasuries during the month. Primary issuance in both investment grade and high yield markets increased last month allowing for better price discovery. Much like stock sectors, bond sectors mattered last month. Intermediate bonds well outperformed longer duration issues.


Municipal bonds were negative for the second straight month although outperformed Treasuries in May on a total return basis. While 5–15-year tax-exempt debt fell the most, shorter term bonds remained somewhat stable. Municipal funds continued to see outflows during the month, driving yields higher. Dealer bid lists from banks (like SVB) in large scale liquidations also contributed. Continued selling in municipals have caused relative valuations to reach the most attractive levels since the beginning of the year.


Data Recap


Last month, the nonfarm payroll report came in stronger than expectations (253k versus expected 185k). Revisions to March were much lower, tempering the large increase in April. The JOLTS job opening indicator continued to fall, and “quit” rates are slowing as well.  In all, the jobless claim numbers remain low, keeping the consumer strong.


Inflation data seemed to have stopped slowing in May, making Fed officials decidedly split near term policy decisions. While core CPI and PPI were slightly lower on a year over year basis, many of the inflation reports have started to rebound. Last month, the prices paid index for both manufacturing and services rose slightly. Unit labor costs unexpectedly jumped for the first quarter, and average hourly earnings increased in the employment report. In addition, the GDP price index rose to 4.2% from 4% and the core PCE quarter over quarter figure ticked back up to 5%. All signs seem to point to some revision on goods and services, but wage inflation and owners’ equivalent rents may continue to be the hardest fight for the Fed.


The US consumer continues to show resilience. Personal spending jumped last month. Retails sales moved higher. Housing starts and new home sales have remained elevated despite higher rates, yet existing home sales have slumped (possibly with low inventory). Consumer sentiment rose last month. In addition, oil prices fell below $70 dollars, falling over 11% in May.


As the “close call” with disaster seems to have been avoided with congressional agreement not to alter the definition of a “risk-free” rate, market participants have refocused. Data dependence will be key to assess the upcoming 6/14 FOMC policy meeting. Piton believes a “hawkish pause” makes sense at this point, given the pullback in credit from regional banks, ongoing budget discord, and a longer-term inflation expectation that seems to be well anchored. The FOMC will get to look at inflation data and a jobs report before their next meeting. Investors seem split on the possibility of a pause, or continuing rate hikes to focus on a 2% inflation bogey.

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