Following a solid run so far this calendar year, equity markets took a breather during May with the Australian market declining by 2.6%, dragged lower by consumer discretionary stocks impacted by signs of a slowdown in consumer spending. The US market fared a bit better, improving by 0.7% buoyed by a resolution to the US debt limit standoff where, as expected, both parties reached an 11th hour compromise agreement. Europe was down 2.1% however the major underperformer for the second month in a row was China which fell by 8.2% on concerns that the economy has failed to recover as anticipated following the lifting of COVID restrictions. This impacted negatively on commodity prices with iron ore down 9.2% and oil 9.6% lower which pushed the Australian dollar 2% lower against the greenback, finishing at US 65 cents. Bond yields crept higher over the month in anticipation of further increases in interest rates with Australian 10-year government bond yields increasing by 26 basis points while US 10-year treasuries were 19 basis points higher.
The RBA in Australia surprised the market by increasing cash rates by 25bp to 4.1% early in June citing nascent wages pressures highlighted by the 5.8% increase in the minimum wage approved by the Fair Work Commission. This sets the stage for a potential wage inflation spiral through collective bargaining agreements as employees attempt to restore the value of their real wages.