Financial Bulletin – May’22


April proved to be a perturbing month for many investors as inflationary pressure continued to build at the same time as the world economy showed signs of weakening.

UK inflation reached 7%, the highest rate since 1992, whilst US inflation reached 8.5%, a rate not seen since the early 1980’s.  

Making Central Banks’ task harder, however, is the fact that the world economy is now noticeably weakening.

The US economy unexpectedly contracted in the first quarter, despite most analysts expecting modest expansion. A repeat performance in the second quarter of the year would mean an official recession.

Further muddying the outlook for investors is the strict COVID lockdown in Shanghai, the largest container port in the world, which will surely only serve to stretch supply chains further.  

In the face of the uncertain outlook many stock markets had a tough month. In the midst of it the tech-heavy Nasdaq officially entered a ‘bear market,’ meaning it has lost 20% from its peak.

Over the last 6 months the FTSE 100 returned 5.48%, the S&P 500 returned -10.00%, whilst the Euro Stoxx 50 returned -9.74%.

The Japanese Nikkei 225 returned -9.44% over the same period.

The broad emerging markets index returned -14.14% in US$ terms.

The 10 year US Treasury yield rose substantially over the month and touched 3% towards the end of April – a level not seen since 2018.

US Economic News

The US economy actually contracted in the first quarter of the year (according to the preliminary estimate) which came as a shock to many.

It raises the real possibility (though considered unlikely) that the US will enter a recession this year.

More forward-looking surveys pointed to a significant fall in business confidence across the economy although consumer demand is still reasonable.

At the same time as growth is faltering,  the rate of inflation continued its move ever higher, reaching 8.5% in March.

If anything the Federal Reserve became more assertive in their language surrounding inflation during the month. Two members of the committee openly talked about a 0.50% interest rate hike, rather than the normal 0.25%.

Meanwhile the Chair of the Fed, Jerome Powell, suggested it was appropriate to move faster in bringing inflation down.

The Central Bank is likely to be particularly concerned that inflation expectations have risen to their highest level for decades.

Policymakers will want to bring these expectations back down to 2% before inflation becomes self-fulfilling.

UK Economic News

The UK consumer began showing the strain of a higher cost of living during April.

The latest surveys from the important services sector suggested that momentum noticeably slowed and many businesses reported weaker consumer demand.

Official retail sales across the economy fell by more than expected.

Unfortunately, the squeeze on consumer incomes shows no sign of abating– inflation reached 7% in March and is expected to keep rising for several months.

One bright spot for the UK economy remains the labour market. New jobs are still being created at a steady rate and the official unemployment rate fell to just 3.8%, in line with the pre-pandemic low.

The current circumstances pose a significant challenge for the Bank of England as they try to reduce inflationary pressure without tipping the economy into recession.

The Central Bank did not have a meeting during April but it is anticipated that the Monetary Policy Committee will raise rates for the fourth time in a row at its May meeting.

Eurozone Economic News

The latest surveys from the Eurozone economy were surprisingly positive, with demand being propelled higher by the services sector.

This is likely to be more as a result of the relaxation of COVID measures than underlying strength, however.

In contrast to the services sector the manufacturing sector essentially stagnated as supply chains came under severe pressure.

Due to the Eurozone’s reliance on Russian energy, particularly Germany, Eurozone consumers and businesses are particularly exposed to rising energy prices.

Inflation is running at 7.5% across the region which is easily the highest rate on record.  

The situation is posing a significant challenge for the European Central Bank as it attempts to weigh the short-term inflation risk against the medium-term recession risk. So far the ECB has resisted calls to raise rates.

Also during the month Emmanuel Macron beat Marine Le Pen in the French Presidential Election. This removed some political risk as Le Pen was seen to be more anti-business.  

Wider Economic News

The Chinese authorities continued to pursue its ‘zero COVID’ approach to COVID-19 by extending a strict lockdown in Shanghai, the largest city in the country and a major trading port.

As a result, the latest manufacturing surveys suggested the sector is deteriorating at a similar rate as at the start of the pandemic.

Any continued disruption at Chinese ports is likely to have a significant impact on the world economy.

Financial Markets and Corporate News

In response to the uncertain outlook equity markets struggled to find a direction during April, often rallying on one day only to sell-off the next.

However, the overall trend was down and the tech-heavy Nasdaq officially entered a ‘bear market.’  

Over the last 6 months the FTSE 100 returned 5.48%, the S&P 500 returned -10.00%, whilst the Euro Stoxx 50 returned -9.74%.

The Japanese Nikkei 225 returned -9.44%.

The broad emerging markets index returned -14.14% in US$ terms.

For bond markets, however, the direction is much clearer – yields are rising.

The 10 year US Treasury Bond yield was approaching 3% by the end of the month, a level which has not been breached since 2018.  

The Investment Association (IA) UK Gilts sector returned -8.81% over 6 months, whilst the IA Sterling Corporate Bond sector returned -7.73% and the IA Sterling High Yield sector returned -5.70%.

 Summary of Key News:

  • Inflation rates continued to climb ever higher, reaching a 40-year high in the US.
  • The US economy contracted in the first quarter of the year.
  • UK retail sales fell as consumers tighten their belts.
  • The Eurozone economy actually strengthened but the future looks less rosy.
  • The Chinese economy is being badly affected by the strict COVID lockdowns.

Financial Markets:

  • Over 6 months the FTSE 100 returned 5.48%, the S&P 500 returned -10.00%, and the Euro Stoxx 50 returned -9.74% (total return).
  • The Japanese Nikkei 225 returned -9.44% (total return).
  • The broad emerging markets index returned approximately -14.14% (in US$ terms).
  • The   IA UK Gilts    sector    returned -8.81% over 6 months, whilst the IA Sterling Corporate Bond sector returned -7.73%, and the IA Sterling High Yield sector returned -5.70%.


Being a Central Banker at the moment is not an enviable task.

Errors could easily be made as they attempt to tread a fine line between reducing inflationary pressure and preventing their economies from entering a significant recession.

For now at least the US Federal Reserve and the Bank of England clearly view inflation as their number one priority.

At some point, however, they will surely shift their focus to preventing a protracted recession. The fact that the services sector is already losing momentum might mean this point will come sooner rather than later.

The ideal scenario would be a ‘soft landing’ whereby inflation expectations are brought under control without employment and economic growth taking too much of a hit.

Unfortunately, the history of Central Banks’ actions suggests that this is unlikely.

Central Bank policy will also be crucial to the immediate course of stock markets.

Since the start of the year, we have seen a rotation away from highly valued ‘growth’ stocks (such as technology) and towards ‘value’ stocks (such as banks and physical retail).

The question of how far, and how long, this trend continues for likely depends to a large extent on whether investors truly believe that interest rates will remain materially higher. For as long as the answer to this key question remains uncertain volatility is likely to be a feature of stock markets.