Markets were choppy during May as investors’ ongoing preoccupation over inflation was compounded by a raft of interest rate increases. The US Federal Reserve (Fed) raised its key interest rate by 50 basis points during May to a range of 0.75% to 1%.
- Eurozone inflation surged to 8.1% YoY
- ECB set to exit negative rates by the end of Q3
- US benchmark T-bond yield breached 3%
Fed raises rates by 50 bp: markets were choppy during May as investors’ ongoing preoccupation over inflation was compounded by a raft of interest rate increases. The US Federal Reserve (Fed) raised its key interest rate by 50 basis points during May to a range of 0.75% to 1%. Fed officials are set to implement further tightening measures during 2022, with the federal funds rate forecast to reach almost 2% by the end of the year.
“Fed officials are set to implement further tightening measures”
US inflation remains at a four-decade high: inflationary pressures moderated slightly in the US during April: the rate of consumer price inflation eased from 8.5% year on year in March to 8.3% as petrol price rises eased. Nevertheless, it remained at a four-decade high, underpinned by rising prices for housing, food and travel. The Dow Jones Industrial Average Index ended May largely unchanged, while the yield on the US 10-year Treasury bond rose above 3% for the first time in over three years during the month.
Inflation grips Europe: Europe’s annualised rate of inflation surged from 7.4% in April to a fresh all-time high of 8.1% during May, driven up by energy prices. Some countries in the euro area – including Estonia, Lithuania, Latvia and Greece – are experiencing double-digit annual inflation rates, whereas inflationary pressures in countries such as Malta and France are comparatively muted at 5.6% and 5.8% respectively. The European Central Bank (ECB), however, believes that inflation in the eurozone is set to be “on target over the medium term”. The Dax Index rose by 2.1% during May.
ECB tightening in sight: amid heightened expectations of monetary tightening in Europe, the yield on Germany’s benchmark goverment bond breached 1% during May. ECB President Christine Lagarde commented: “We are likely to be in a position to exit negative interest rates by the end of the third quarter”.
Rates rising in Asia: the Reserve Bank of India increased its benchmark rate by 40 basis points to 4.4% in a bid to curb inflationary pressures, and the Reserve Bank of Australia raised its key interest rate by 25 basis points to 0.35% during the month – its first rate increase in over a decade. Elsewhere, Japan’s economy contracted by 1% year on year during the first three months of 2022. The Nikkei 225 Index climbed by 1.6% over May.
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