Disconnect the telephone line Relax and draw that blind

Should one sell in May and go away, as the saying goes? If one took a straw poll of the city analysts, the answer from them would probably be yes, and certainly, the first day of May was not the best for global stock markets. The relative strength of the global economy, in the first four months,  despite tighter monetary conditions, has taken many economists by surprise. Employment and the consumer holding up helping support the world’s largest economy. Sentiment and positioning remain cautious, largely convinced this is a bull rally in a bear market.

The resilience of stocks to multiple headwinds, in particular the return of the failure of the banking sector, has wrongfooted many. Financials, in particular, led the market lower on Tuesday, despite the news that JP Morgan had agreed to buy First Republic Bank, supported by the regulators. Probably one of the surprises of the year so far has been the relative resilience of the European economy, which recently led to upgrades to forecasts of growth for the year ahead.

The question over the debt ceiling once again making headlines, and will the US government default on its debt? As a distant observer, one has to wonder what the purpose of the ceiling is, as it has been raised 78 times in the last 60 years. The answer is to control spending by the incumbent government, but it seems to fail in that task as each regime spends and then seeks approval of Congress, which is given with a bit of horse trading to avoid a default. No party wants to be seen to be the one that forces the US to default on its obligations and, in turn, fail to pay its employees.

Of course, later today will be the focus as the Fed meets again after a 6-week break and will announce its latest interest rate decision. The forecast is for a 25 basis point hike; as always, the accompanying statement from Jerome Powell as to the outlook for interest rate policy in the coming months will focus most attention.

Headline inflation rates remain above the Fed’s 2% target, unemployment is low, and the consumer continues to support the economy, all of which aids the call for higher rates. In the past month, the Citi economic surprise index has rolled over in May, a sign that economic data is not now meeting analysts’ expectations. Unemployment rates may remain low, but the number of new job openings has been falling for several months. The impact on regional banks of higher interest rates may deter some members from further rate hikes and lead to some dissension in the ranks.