June witnessed another month of negative performance for global equities, although a strong recovery in the latter part of the month helped the MSCI All Country World Index to minimize its losses, ending with a decline of only 0.2%. Yields on US Treasuries and core eurozone government bonds also retraced from their recent highs, while UK Gilts underperformed, especially those linked to inflation.
Investors continue to be concerned about supply chain disruptions, although some easing has been observed. However, ongoing conflicts in Ukraine and lockdown measures in China have introduced new challenges for manufacturing and food sectors.
Following a solid first-quarter earnings season, company reporting has slowed down. Overall, analysts' guidance remains positive despite cost pressures, and earnings estimates have slightly increased since the beginning of the year. This, combined with the year-to-date decline in share prices, has made global forward valuations relatively cheaper compared to the 10-year average. However, doubts persist about the sustainability of rising earnings amid slowing growth and rising costs.
Valuations for leading US growth stocks have declined, with forward earnings multiples around 20 times, significantly lower than the peak of nearly 30 times. Value shares, on the other hand, are trading at around 15 times earnings. Despite these declines, the current levels are not considered cheap in the context of previous stock market corrections. Due to expectations of further de-rating, risk exposure has been scaled back recently.
In the US, inflation remains a prominent concern for investors, along with hawkish central bank actions. However, there is increasing focus on economic growth and how it will withstand aggressive monetary policy tightening. The Federal Reserve implemented a 50 basis point rate hike at the beginning of June, the largest increase since 2000, and markets anticipate similar rate hikes in the next two meetings. Market expectations suggest the year-end fed funds rate will reach approximately 2.8%, significantly higher than the current 1.0%. Nevertheless, there is a growing debate about a potential slower pace of tightening, with a pause in the hiking cycle possibly occurring in September.
Encouraging signs indicate that US inflation may be nearing a cyclical peak. The consumer price index slowed to 8.3% in April, down from the previous month's 41-year high of 8.5%. The latest core personal consumption index, considered the Fed's preferred inflation metric, stood at 4.9%, lower than the March reading of 5.2%. The labour market in the US continues to strengthen, with 390,000 nonfarm jobs added in June, surpassing the consensus forecast of 320,000. The unemployment rate held steady at 3.6%, and average earnings growth decreased to 5.2% annually from 5.5% in April, suggesting that broader cyclical price pressures might be close to their peak. US large-cap shares experienced a modest gain for the month after reaching new lows for the year. Growth and tech stocks, while still lagging, bounced back significantly towards the end of the month, resulting in modest declines of just under 2% after experiencing a 10% decline earlier.
In the UK, inflationary pressures continued to rise, with the consumer price index reaching a 40-year high of 9.0%. Alongside higher commodity prices, a tightening labour market contributed to upward price pressure. The unemployment rate for the three months leading up to March fell to its lowest level since 1974, standing at 3.7%. Vacancies now exceed the number of job seekers for the first time on record. The UK faces a potential prolonged tight labour market due to factors such as aging demographics, early retirements, immigration, and an increase in long-term sick/awaiting medical treatment.
Governor of the Bank of England, Andrew Bailey, stated that the bank can do little to prevent double-digit inflation later in the year. The Monetary Policy Committee unanimously supported a 25 basis point rate hike to 1.0%, marking the fourth consecutive policy meeting with a rate increase. The interest rate futures market currently indicates a year-end bank rate around 2.4%.
Economic data releases in the UK indicated a slowdown in activity, in contrast to the absence of economic weakness in the US. Flash purchasing managers' index readings for both manufacturing and services in the UK came in lower than expected, with the composite reading reaching its lowest level since January 2021 when the country was under full lockdown. Gilts experienced significant declines as yields rose, particularly inflation-linked gilts, which saw a larger drop due to their longer duration. Notably, a £15 billion package was announced to assist households in coping with rising domestic fuel bills. The economic stimulus will be partially funded by a 25% "energy profit levy," which is expected to raise £5 billion this year and increase the tax rate for North Sea oil and gas producers from 40% to 65%. Chancellor Rishi Sunak assured that these measures would have minimal impact on inflation, and the Office for National Statistics (ONS) indicated that the treatment of the rebate might reduce headline inflation figures.
The ongoing conflict in Ukraine continued to push oil prices higher, with Brent Crude rising over 12% during the month. UK large-cap shares gained over 1% in June, bringing the year-to-date benchmark gain close to 4%, primarily driven by energy stocks. The European equivalent performed even better, with a 1.3% increase in June, although the index is still down nearly 10% for the year.
Eurozone inflation reached a new record high in June, surpassing expectations and rising to 8.1% from the previous 7.5%. Energy prices were the main driver of cost-push inflation in the region, exacerbated by events in Ukraine. The core inflation reading, which excludes energy and food prices, showed a spread of more than 4% compared to the headline figure.
The European Central Bank (ECB) has yet to move away from its record-low interest rates, but expectations are growing that it will do so soon. Philip Lane, the ECB's chief economist, suggested a 25 basis point rate increase in July and another one in September, considering this as the "benchmark" for the governing council. Market expectations imply approximately 100 basis points of rate increases by the end of 2022, with the current deposit rate at -0.5%.