Market index returns

Month to date since April 30, 2024 as of May 31, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Global equities rose in May and continued to climb over the first three days of June on the back of better-than-expected earnings results, particularly from the tech sector and mega-cap artificial intelligence (AI) chip maker Nvidia, and bond yields abating. The MSCI World Index notched new all-time highs during May and even set a new record high on June 5th. While central banks largely stood pat in May, the beginning of June saw the start of the expected global easing cycle with rate cuts in both Canada and Europe. Overall, sovereign bond yields declined in May, and while rates did pick up in the back half of the month, they relented again in early June with the 10-year U.S. Treasury yield dropping to 4.27%, its lowest level since March of this year. Against this backdrop, Real Assets also rose in May, but underperformed broader equities. Most Real Asset classes continued to rise in early June, although Natural Resources equities and Commodities pulled back. Global Infrastructure securities led the Real Asset classes in May and outperformed the broader equity markets on the back of strong returns from Americas and Europe Communication. Global Real Estate Securities followed, rising on solid performance from property stocks in Europe and the UK, but underperformed broader markets. Natural Resource equities, Commodities, and TIPS all saw positive performance in May, but with slighter returns.

Why it matters: Monetary easing in the U.S. isn’t expected to start until late this year or perhaps not even until 2025, yet there are already signs of consumer fatigue, a mixed employment picture, and slowing economic growth. Inflation has not yet been fully tamed, and the question arises: does the economy have enough resiliency to avoid a meaningful slowdown or will rate cuts be needed and if so, will they come in time? Meanwhile, Europe is already in recovery mode, but will the easing of rates there lead to reignited inflation? China’s prospects are looking better, but they still have big issues to solve in their property markets, and stimulus to date may not be enough. Elections can also present unknowns, especially with over 40 countries holding national elections this year. Recent results in Mexico and India surprised some market participants and led to regional stock market and currency volatility. Elections in the EU are underway now, the UK will hold voting in early July, and the U.S. in early November, any of which could have profound implications for returns divergence among and within asset classes and sectors, as well as volatility in broader capital markets and world order.

Macro Dive: We first review recent employment data in the U.S. and how it might tilt the Fed’s hand. Next, we’ll look at data from the Institute of Supply Management (ISM), which continues to show a divergence between services and manufacturing activity. Then, we’ll recap the big moves made by a couple central banks this week.

• Payroll and earnings strong, but job openings soften: While a lot of employment data was released this week, it was the nonfarm payroll and hourly earnings data that were market-moving, sending Treasury yields higher and pushing back expectations for the Fed’s first rate cut. Per the Bureau of Labor Statistics, 272k jobs were created in May, defying consensus estimates of 180k, and above the trailing 12-month average of ~230k. Hourly earnings were also strong, at 0.4% month-on-month and 4.1% year-on-year, above expectations and accelerating from April. However, the unemployment rate ticked up to 4.0%, which was 10 bps above both expectations and April’s level and represented the highest print since January 2022, albeit still at a low level on a longer-term basis. There was concern about employment trends earlier in the week as ADP data showed only 152k jobs added in May, below estimates of 175k and April’s revised 188k new jobs. Furthermore, the JOLTS reports this week showed 8.06M job openings (the lowest since February 2021), falling from April’s 8.36M openings, which itself was revised downward by 133k. Nevertheless, Friday’s strong payroll data presented evidence that an early rate cut from the Fed was unlikely, with market participants pushing back expectations on timing, with a full rate cut not priced in until December (per the Fed Funds futures market). 
• Services over manufacturing trend continues: May ISM data was released over the last week and showed that services activity expanded while manufacturing activity continued to contract. The ISM Services Index at 53.8 exceeded expectations of 51.8 and rebounded from April’s 49.4 (which was one of only two contractionary months since 2020). Interestingly, Real Estate and Rental & Leasing represented the industries with the most growth, while Retail Trade, Agriculture, and Forestry were the weakest. The Services Prices Paid registered at 58.1, below expectations and below April’s 59.2, but indicates that inflation in services is still present. Services New Orders clocked in at 54.2, higher than expectations and April’s print, and was the 17th consecutive month of expansion. The ISM Manufacturing Index painted a different picture with a read of 48.7, below expectations and April’s level, and was the 18th month of contraction out of the past 19 months. New Orders in Manufacturing was particularly troublesome at 45.4, below expectations of 49.4 and April’s 49.1. Manufacturing Prices Paid eased to 57.0 below expectations and April’s 60.0, but indicated inflation is still present in manufacturing.
• If you ain’t first, you’re last: The Bank of Canada (BOC) became the first Group of Seven (G7) central bank to cut interest rates to start its easing cycle. The BOC lowered its main rate by 0.25% as officials became confident that inflation would decline to its 2% target. Officials also noted that further cuts could be in the offing if inflation continued to abate but cautioned that rates were not likely to return to pre-COVID levels. The following day in Europe, the European Central Bank (ECB), for the first time ever, started an interest-rate cutting cycle ahead of the Fed by reducing rates by 25 bps, bringing its deposit facility rate to 3.75%. Even as ECB President Christine Lagarde noted that the inflation situation has improved “markedly,” ECB staff increased their 2025 inflation projections by 20 bps to 2.2% for the full year while also lowering real GDP growth by 10 bps to 1.4% for the same period. Projections for 2026 were left unchanged, with harmonized inflation at 1.9% and GDP growth at 1.6%. With May’s Eurozone inflation coming in higher than expected at 2.6%, and 2025’s forecast revised higher, expectations of future rate cuts from the ECB have been reduced, with investors only pricing in one full additional cut this year per overnight index swaps.

Real Assets, Real Insights: First we look at what’s driven the outperformance in Australia’s listed property stocks, before reviewing a proposed transition in the waste space. We then conclude with the outcome from the recent OPEC meeting and why it’s not having the desired effect on crude oil prices.

• Can Australian REIT outperformance continue? (Real Estate): Australian REITs (AREITs) have outperformed the global EPRA Developed REIT Index by nearly ~8% year-to-date (in USD terms). The predominant driver of Australia’s performance can be attributed to the ~18% outperformance of recent index entrant Goodman Group (GMG). GMG entered the global index as a top-ten global REIT by equity cap and has been in high demand, given its consistent earnings growth track record and a large and growing data center development pipeline (currently 4.3 GW). Strong outperformance by a country can often invite reversion, but our Australian research team believes Australia stands a good chance of continuing to outperform over the balance of 2024. We expect earnings growth for Australian REITs will trough in 2024 and inflect higher year-over-year for at least the next two years (+~18% overall), supported by a weakening debt cost reversion, a re-emergence of growth from residential and manufactured housing development books, and an improving funds management outlook.
• The trashman cometh (Infrastructure): This week, Waste Management (WM), a leader in services such as waste collection, recycling, and waste-to-energy facilities (which we wrote about last week), announced a definitive agreement to acquire Stericycle (SRCL) in a cash for shares and assumption of debt transaction, valuing the entity at $7.2B. SRCL shareholders will receive $62 per share, which represents a 24% premium to SRCL’s 60-day volume weighted average price before the deal was announced. SRCL is predominantly involved in regulated medical waste disposal and secure information destruction services and will help WM broaden service offerings to its corporate customers. WM expects $125M in projected annual synergies and that the deal should be accretive to earnings and cash flow within one year following the close. The deal still requires regulatory approval and approval by a majority of the holders of Stericycle’s common shares. WM, which had an equity capitalization of over $84B as of May 31st, expects to finance the transaction using a combination of bank debt and senior notes.
• Has OPEC lost its mojo? (Commodities): OPEC+ concluded a production quota meeting last weekend, which was held virtually, and agreed to extend previous production cuts of 3.7 MM bbls per day through the end of 2025, a full year extension. However, voluntary cuts of just over 2 MM bbls per day, which are predominantly from Saudi Arabia and Russia, will begin to be phased out this October. The United Arab Emirates (UAE) was the only country to see its production quota increased and will be allowed to produce 3.5 MM bbls per day when the increase is fully reflected by September of 2025, an increase of 300k bbls per day from current levels. Oil market participants were not impressed and crude oil prices, which had already been receding before the meeting, continued to fall post-meeting, with front month futures contracts on WTI crude falling to as low as $73/bbl and Brent crude dropping to the mid-$77s before some recovery. It’s unclear to us how the markets will be able to absorb an additional ~2 MM bbls per day from OPEC+ on top of projected acceleration production from non-OPEC producers amid struggling global demand. China remains the wildcard on the demand side, as they have accounted for about 70% of the demand in oil growth, and additional stimulus for the Chinese economy would be required to further increase demand and offset the global supply additions coming this year and next.