This week marked the end of May, with the S&P 500 reaching its highest level since mid-August 2022 and the Nasdaq Composite hitting its best level since mid-April 2022. The agreement reached between the White House and Republican congressional leaders to raise the federal debt limit and avoid a default did not significantly impact investor sentiment, as indications of a deal had already emerged. Economic data took centre stage, with U.S. employment data in the spotlight.

The Senate passed legislation to suspend the U.S. debt ceiling and impose restraints on government spending through the 2024 election. President Joe Biden is set to formally end the month-long debt-limit crisis this weekend.

Employment data released during the week was mixed. A report on Wednesday showed that job openings rebounded much more than expected in April and hit their highest level (10.1 million) since January. However, Friday’s release showed that U.S. unemployment unexpectedly rose from 3.4% to 3.7%. The Labor Department also highlighted an increase in the number of people losing jobs or completing temporary positions, reaching the highest level since February 2022. Overall, these findings suggest a more challenging job market for workers. The Federal Reserve is signalling that they plan to keep interest rates steady in June while retaining the option to hike further in coming months. Friday’s unemployment data reinforces this possibility.

Another encouraging sign regarding interest rates was the release of U.S. manufacturing data for May. Data showed a seventh straight monthly contraction in factory activity, as expected. Encouragingly, prices paid for supplies and other inputs by manufacturers contracted at the fastest pace since December, defying expectations for a modest increase.

Eurozone inflation decreased more than expected in May, increasing by 6.1%, also down from a 7.0% increase in the previous month. The unemployment rate decreased to 6.5% in April, in line with market expectations, following a revised rate of 6.6% in March. Manufacturing PMI in the eurozone declined to 44.80 in May, down from 45.80 in the previous month.

UK house prices experienced a marginal decrease of 0.1% on a monthly basis in May, following a revised increase of 0.4% in the previous month. Market expectations had anticipated a 0.5% decline. This decline in house prices reflects wider concerns in the UK property market. Moody’s recently downgraded the debt of Canary Wharf, a prominent symbol of the global real estate downturn. The east London financial district, saw its debt rating lowered from Ba1 to Ba3.

In China, the official manufacturing Purchasing Managers’ Index (PMI) dropped unexpectedly to 48.80 in May, indicating a contraction for the second consecutive month. This suggests that the post-Covid recovery in China’s economy is facing challenges. However, the services PMI rose to 54.5, albeit below expectations, but still indicating expansion.

On the other hand, the private Caixin manufacturing PMI index surprisingly increased to 50.90 in May, contradicting the official data and showing a slight expansion in manufacturing activity. The Caixin index mainly covers smaller and export-oriented businesses.

U.S. and Asian markets were stronger this week, whilst European markets ended in negative territory. In the U.S., the Dow Jones (+2.02%), S&P 500 (+1.83%) and Nasdaq (+2.04%) all ended the week higher. Similarly, the Nikkei 225 (+1.97%), Hang Seng (+1.05%) and Shanghai Composite Index (+0.55%) also ended the week higher, whilst the Euro Stoxx 50 (-0.32%) and FTSE 100 (-1.80%) were negative.

For the month of February, the United States (U.S.) saw a drop in job openings to under 10 million, marking the first time this has happened in nearly two years. The Job Openings and Labour Turnover Survey (JOLTS) report showed that job openings, which are an indicator of labour demand, decreased by 632,000 to 9.9 million – the lowest level since May 2021. This figure was below the 10.4 million job openings forecasted by economists surveyed by Reuters. Despite the larger-than-expected decline, the labour market remains tight, with 1.7 job openings available for every unemployed person in February, down from 1.9 in January. Moreover, the JOLTS report showed a slight decrease in both hires and separations with quits increasing by 146,000 to just over 4 million, indicating confidence in the labour market’s ability to switch jobs.

Payroll processing firm ADP reported that private sector hiring slowed down in March.  Company payrolls increased by 145,000, which was lower than the Dow Jones estimate of 210,000 and down from 261,000 in February. The average monthly hiring rate for the first quarter was 175,000 jobs, lower than the 216,000 in the previous quarter and a significant reduction from the average of 397,000 in the first quarter of 2022. Similarly, the Labour Department’s Nonfarm payrolls report also showed signs of an early-stage slowdown in the jobs market, with payrolls growing by 236,000 in March, below the upwardly revised 326,000 in February and the Dow Jones estimate of 238,000. The Labour Department also reported that the unemployment rate ticked lower to 3.5%, against expectations that it would hold at 3.6%.

For the week, the benchmark S&P 500 fell by -0.10% while the tech-heavy Nasdaq dropped by -1.10%. In contrast, the Dow Jones ended the week on a positive note, with a weekly gain of +0.63%. Oil prices experienced a third consecutive weekly gain of +6.27% as market participants evaluated the impact of OPEC+’s planned production cuts and declining U.S. oil inventories, while also factoring in concerns about the global economic outlook.

According to the Bank of England’s (BOE) Chief Economist, Huw Pill, officials might need to increase interest rates to prevent a rebound in prices caused by households and companies trying to recover their lost income, even as inflation decreases. This view differs from that of colleague Silvana Tenreyro, who suggested at a separate event on Tuesday that the BOE may have to reduce rates “earlier and faster” due to the rapid pace of tightening. The Chief Economist, Pill, did not provide any guidance on how he would vote at the BOE’s next rate decision on May 11. Financial markets currently predict a 70% chance of another quarter-point rate increase at the BOE’s next meeting.

Like their British counterparts, ECB officials, including President Christine Lagarde, Vice President Luis de Guindos, and Chief Economist Philip Lane, have indicated that another interest rate hike is imminent. Lane has stated that if inflation follows the projected path outlined in the ECB’s March economic projections, the bank will need to raise rates in May. Although the ECB has already raised rates by a total of 350 basis points since July 2022, it has not given any specific guidance for its upcoming May 4 meeting, citing turbulence in the financial sector as a reason for caution. While several other policymakers echoed the view that rates might rise, they also said they believed rates were nearing a peak.

For the week, the FTSE 100 ended positively, gaining +1.44%, while the Euro Stoxx 50 declined by -0.13%

On Tuesday, Finland officially joined the North Atlantic Treaty Organization (NATO) as its 31st member. This marks the end of Finland’s seven-decade-long military non-alignment and abandonment of their neutrality. Finland’s decision to join NATO has doubled the length of the border that NATO shares with Russia and strengthened its eastern flank, which is crucial as the war in Ukraine continues with no signs of resolution. By becoming a member of NATO, Finland can access the resources of the entire alliance in case of an attack, providing a guarantee of protection to the northern European nation.

In China, the private Caixin/S&P Global survey showed that services activity increased to 57.8 in March, up from 55.0 in February. This marks the third consecutive month of expansion since Beijing lifted pandemic restrictions in December. However, the survey’s manufacturing gauge slowed to 50.0 in March from an eight-month high in February due to sluggish global demand. The weaker-than-expected Caixin/S&P manufacturing data corresponds with the official manufacturing Purchasing Managers’ Index released the prior week, which also declined from February’s level but remained in expansion. Index readings above 50 indicate growth compared to the previous month.

Chinese stocks rose during the holiday-shortened week, driven by a rebound in services activity which boosted investor confidence. The Shanghai Stock Exchange Index gained 1.67%. In contrast, Japanese stocks fell, with the Nikkei 225 Index dropping by -1.87%, stocks also fell in Hong Kong, with the Hang Seng declining by -0.85%.

The failure of Silicon Valley Bank (SVB) last Friday set off a wave of investor fears that further collapses in banks would follow. Another large regional bank, New York’s Signature Bank, which had heavy exposure to cryptocurrency markets, then also collapsed last weekend. However, on Sunday, March 12, the Federal Reserve (the Fed), the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department made an announcement that all depositors of SVB would be granted complete access to their funds on Monday morning. Additionally, the Fed made more funding available to banks to protect deposits and prepared for addressing any potential liquidity issues. Nearly $143 billion in additional funds were loaned to the FDIC to backstop the failed SVB and Signature Bank.

The Fed’s additional funding proposed last Sunday came in the form of the Bank Term Funding Program, which was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. Since last Sunday, U.S. banks have borrowed $11.9 billion from the Bank Term Funding Program. Through this program, banks are able to obtain one-year loans with favourable conditions in return for providing collateral of high quality. All the emergency lending resulted in a total of $303 billion being added to the Fed’s balance sheet, which counteracted a significant portion of the quantitative tightening that the Fed had initiated since June.

Later in the week, U.S. bank First Republic, which had a focus on the tech sector similar to SVB, came under pressure after investors saw similarities between First Republic and the failed Silicon Valley Bank. A rescue plan was coordinated and on Thursday morning, First Republic, the 14th-largest bank in the country, received a cash infusion from 11 rivals, including America’s largest lenders. The rescue plan detailed that the group of banks would deposit $30 billion with First Republic for an initial period of 120 days, in an effort to calm fears about its balance sheet. In recent days, regional banks have experienced significant outflows of deposits, as customers have been transferring their funds to the large banks that are involved in the rescue efforts.

Hopes that the Fed might adjust its monetary policy in response to the banking sector events seemed to drive a rally during the week. By the end of the week, futures markets were pricing in zero likelihood of a 50 basis point hike by the Fed in March compared with a 40% chance of one the week before. Markets were also placing a nearly 99% probability that the federal funds target rate would end the year lower than its current range of 4.50% to 4.75%. In other news, U.S. inflation moderated in February, rising 6% y/y, in-line with expectations, down from 6.4% y/y in January, while core inflation declined to 5.5% from 5.6% in the month before.

Shares of Credit Suisse, the Switzerland-based financial giant, sold off after the chair of Saudi National Bank, its largest shareholder, announced that it would not invest further capital in the company. This event occurred shortly after Credit Suisse postponed the publication of its annual report due to the presence of “material weaknesses” in its controls for financial reporting. Following a steep drop in the value of Credit Suisse’s shares, the Swiss National Bank (SNB) offered a credit line of CHF 50 billion ($54 billion) to the bank on Wednesday evening, which provided temporary support to the stock price. Multiple sources have reported that UBS is currently in talks to acquire either all or a portion of Credit Suisse. The boards of the two largest banks in Switzerland are expected to convene separately over the weekend to examine what could potentially be the most significant banking merger in Europe since the financial crisis.

On Thursday, the European Central Bank (ECB) raised its benchmark rate by 50 basis points, to 3% from 2.5%. The ECB reiterated that future decisions would be data dependent but offered no forward guidance, while stating that “the euro area banking sector is resilient, with strong capital and liquidity positions.”

In an effort to enhance liquidity and stimulate the economy, the People’s Bank of China (PBOC) announced its decision to lower the reserve requirement ratio (RRR) for most banks by 25 basis points. This was the first such reduction made by the central bank this year.

On the market front, U.S. stocks closed mixed for the week on the back of turmoil in the banking sector, concerns over a steeper slowdown in the economy and hopes that the Fed would now be forced to pause its rate-hiking cycle. The S&P 500 gained +1.34% over the week, with cash-flush, mega-cap tech stocks recording robust gains while energy and financial shares slumped. As a result, the Nasdaq rallied +4.41% while the Dow Jones ended the week -0.15% lower.

Shares in Europe (Euro Stoxx 50) declined -3.89%, while the FTSE 100 sunk -5.33%. Chinese stocks (Shanghai +0.63%) managed a slight gain while, in Japan, the Nikkei 225 fell -2.88%. Gold (+6.50%) rallied, benefiting from risk-off sentiment, while Brent Oil fell -12.29% over the week.