Headlines in May were dominated by the US debt ceiling discussions, along with the surge in Artificial Intelligence (AI) related companies. Elsewhere, inflation appears to be more persistent than previously thought, and the US earnings season drew to a close.
A deal to suspend the debt ceiling until 2025, which limits the amount the US government can borrow, was agreed over the weekend and passed by the House on Wednesday. Once passed through both chambers of congress, this bipartisan effort will have removed the prospect of a default, which would have had severe consequences for the economy. Fears of a US default grew throughout May, and this weighed on markets, but the finish line is in sight.
The mini banking crisis that began in March appears to be over for the time being. At the beginning of the month the Bay Area focussed First Republic Bank was taken over by the Federal Deposit Insurance Corporation (FDIC) with their assets then sold to JP Morgan. At the end of the same week Western Alliance Bancorp issued a strongly worded rebuttal including the threat of legal action to an article in the Financial Times suggesting the company was considering a sale of some or all of its business. This appeared to calm the flight of deposits that had imperilled the regional banks for the previous two months. Share prices are yet to recover, suggesting the market is waiting for proof that the crisis of confidence is over.
The hype surrounding the growth and applications of generative AI has been present since the launch of ChatGPT in late November 2022. Previous technology waves have taken time to demonstrate profitability and this has been a notable exception. The results of NVIDIA in particular highlighted the industrial applications of generative AI and stated that the technology is driving exponential growth in compute requirements. Other mega-cap companies, such as Alphabet, Microsoft and Amazon have experienced strong share price momentum in May due to their expected benefit from AI. The growth trajectory suggests that AI will play an even more substantial role in transforming businesses and the global economy in the coming years.
Finally, inflation does not appear to be decelerating as quickly as expected or hoped. The US Personal Consumption Expenditures (PCE) release came in above expectations – this is a key inflationary gauge that the Federal Reserve uses in determining interest rates. Interest rate expectations have been volatile and at times markets have anticipated interest rate cuts to commence as soon as July. There are now some expectations of a further rate rise in June to combat the persistent inflationary pressures however these seem to vary with every passing day. This is repeated elsewhere. The UK released higher-than-expected inflation figures in May and core Consumer Price Index (CPI), which excludes the volatile prices of food and energy, rose to its highest level since 1992. The reading added to concerns that inflation is entrenched, which led investors to rapidly increase their expectations for rate increases from the Bank of England.
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