US bond yields surged, driven by inflation concerns. Nasdaq rose amid Nvidia's surge, with large caps outperforming. USD strengthened, but WTI crude and gold prices fell amidst economic data uncertainties. Bitcoin gained alongside Ethereum ETF approval.

Bond yields in the US saw a significant surge, with the 2-year bond reaching 4.957% and the 10-year bond climbing to 4.470%. This rise reflects the market's reaction to evolving economic conditions, particularly concerning inflation. Inflation data continues to play a crucial role in shaping the trajectory of the yield curve.

The stock markets experienced a downturn overall, the Nasdaq stood out with a notable upswing, primarily fuelled by Nvidia's impressive 13% surge, leading to the index rising by over 1%. US liquidity has increased for the third consecutive week, contributing to the recent winning streak on the Nasdaq 100 and the crypto rally. Across the board, larger companies outperformed their smaller counterparts. The USD strengthened against the EUR, with the USD/EUR rate now at 0.9219.

WTI crude oil prices witnessed a 2.8% decline amid concerns that robust economic data may prolong elevated interest rates, thereby potentially dampening fuel demand and exacerbating the current oversupply situation. Gold prices experienced a downturn, attributed to the dollar's rise and decreasing expectations for rate cuts, prompting investors to seize profits. However, central banks continue to bolster purchases, and major investment entities are revising their target price for gold upward. Meanwhile, Bitcoin recorded a 3.52% gain, coinciding with the approval of the Ethereum ETF during the week.

US business activity surged, driven by services and manufacturing. Housing and consumer sentiment declined, while oil prices dropped due to inventory increases.

The US PMI Composite Output Index surged to a 25-month high of 54.4, driven by the service sector at 54.8 and manufacturing at 50.9, despite rising input costs and manufacturing-led price growth. The housing market saw declines in existing (1.9%) and new home sales (4.7%) due to high mortgage rates, though builders are using incentives to counter affordability issues. Consumer sentiment dropped sharply by 10%, reflecting labour market concerns and high interest rates, increasing pressure on the Federal Reserve to cut rates. Meanwhile, crude oil prices fell due to unexpected inventory increases and mixed signals from gasoline, distillate, and Cushing inventories, with market caution ahead of Memorial Day and the OPEC+ meeting.

PMI Composite Output Index surged to 54.4, a 25-month high, driven by the service sector reaching 54.8 and manufacturing at 50.9. Despite rising input costs, manufacturing led to price growth. Anticipated economic recovery awaits Federal Reserve rate cuts.

In May, the US PMI Composite Output Index surged notably from April's 51.3 to 54.4, reaching a 25-month high. During the same period, the Services Business Activity Index rose to 54.8 (up from 51.3), and the Manufacturing Index climbed to 50.9 (from 50), marking respective 12- and 2-month highs. These robust indicators underscore a significant acceleration in US business activity, predominantly driven by the service sector, which recorded its most substantial output increase in a year. Despite the concurrent increase in both input costs and output prices, manufacturing emerged as the primary contributor to price growth over the past two months. However, the overall rate of selling price inflation remained below the average observed over the last year. Despite ongoing reports of diminished employment, the moderation in job losses, alongside heightened business confidence and increased order book intakes, suggests a promising economic trajectory midway through the second quarter.

We do not anticipate a substantial resurgence in business activity, especially within manufacturing, until the Federal Reserve begins to implement rate cuts and their impact begins to manifest in the economy.

The housing market saw a 1.9% decline in existing home sales and a 4.7% drop in new home sales. Rising mortgage rates sparked concerns among builders, impacting sentiment negatively. Despite challenges, builders are using incentives to stimulate buyer activity amid supply constraints and affordability issues.

In April 2024, the US housing market witnessed a 1.9% MoM decline in existing home sales, marking its lowest point in three months. Simultaneously, new home sales fell below expectations, registering a 4.7% MoM decrease. The escalation of mortgage rates to their highest level since November of the previous year has fuelled apprehensions among builders, resulting in the inaugural decline in homebuilder sentiment since November and its subsequent descent into negative territory in May. This trend has led to diminished affordability and subdued demand within the housing market.

Despite grappling with the challenges posed by elevated mortgage rates, builders have persistently employed incentives, such as mortgage rate buydowns, to incentivize potential buyers to act. The enduring housing shortage, coupled with a shortage of existing home inventory and builders' strategic deployment of incentives, is anticipated to bolster new single-family construction throughout the year. Nevertheless, builders confront formidable supply-side obstacles and the prospect of "higher-for-longer" mortgage rates, which present significant hurdles for both builders and prospective homebuyers. Although the median sale price for a new home dipped by 1.4% compared to March, it remains nearly 4% higher than it was a year ago. Builders are addressing the affordability conundrum by offering price reductions and constructing smaller homes, with the median square footage of a new single-family home now standing at its lowest level since 2009.

In our view, substantial sectoral enhancements hinge on interest rates lowering alongside a decline in mortgage rates. We expect a gradual market rebound by 2025. Regarding investments, without more appealing premiums, investors will likely continue demanding bonds.

Consumer sentiment dropped sharply in May, driven by labour market concerns, high interest rates, and rising inflation expectations, pressuring the Fed.

Consumer sentiment dropped significantly in May by about 10%, the sharpest decline in five months, following three months of little change. This decrease reflects a substantial 8.1 index-point fall, with a notable drop in the year-ahead outlook for business conditions, while views on personal finances remained stable. Concerns over labour markets, expectations of rising unemployment, slowing income growth, and high interest rates weighed on consumer views, posing downside risks to consumer spending. Year-ahead inflation expectations rose slightly to 3.3%, above pre-pandemic levels, while long-run expectations remained steady at 3.0%, still elevated compared to pre-pandemic figures.

We do not anticipate significant improvements in consumer confidence this year. This decline increases pressure on the Fed to cut rates. We maintain our expectation of a rate cut in December.

The recent drop in crude oil prices reflects unexpected inventory increases, and mixed gasoline, distillate, and Cushing inventories. Refining activity rose, suggesting potential oversupply pressure on crude prices and support for gasoline prices.

The recent drop in crude oil prices reflects declining market confidence, compounded by a surprise increase in EIA crude oil inventories last week. There was an unexpected increase in crude oil inventory of 1.825 million barrels compared to an anticipated reduction, indicating excess supply. Additionally, gasoline inventories saw a larger-than-expected decline, while distillate and Cushing inventories increased. Refining utilisation rose by 1.3%, signalling heightened refinery activity. This mixed inventory report presents a complex scenario for market participants, suggesting potential downward pressure on crude oil prices due to oversupply while hinting at possible support for gasoline prices due to higher demand. Market sentiment remains cautious, especially ahead of Memorial Day weekend and the upcoming OPEC+ meeting, where production cuts could be extended amid concerns about inflation, cooling retail spending, and high interest rates that could limit US fuel demand.

We do not expect significant price surprises. The excess supply is sufficient to meet any short-term demand increases, so prices are likely to either decline or remain stable before experiencing any substantial upward movement.