Will US rates rise in June?

US Equity Market

The prospect of higher interest rates absorbed a sizeable proportion of investors’ attention in the US during May. The minutes from the Federal Open Market Committee’s (FOMC’s) April meeting fuelled speculation that policymakers might move to tighten interest rates as early as June, as long as economic data – domestic and external – remain supportive. Towards the end of the month, in a speech at Harvard University , Fed Chair Janet Yellen said that, if the economy and the labour market continue to strengthen, she expects interest rates to rise “gradually and cautiously… in the coming months”.

The Dow Jones Industrial Average Index edged 0.1% higher over May, but rose by 2.1% since the beginning of 2016. The Dow Jones Industrial Average Index achieved its 120th birthday on 26 May. General Electric (GE) is the only constituent remaining from the original list; according to S&P Dow Jones Indices , if US$100 had been invested in GE in 1896, the holding would now be worth £388,000 (stock only; adjusted for splits).

The Nasdaq Index climbed by 3.6% during the month, but fell by 1.2% over the first five months of the year. Meanwhile, the S&P 500 Index rose by 1.5% during May, and by 2.6% over the year to date. Six of the ten industry sectors in the S&P 500 Index rose during May: Information Technology led the risers, followed by Health Care, Financials, Utilities, Consumer Staples, and Consumer Discretionary. The worst-performing sector was energy, followed by Industrials, Materials, and Telecommunication Services. The retail sector came under pressure during the month as several key players announced a drop in sales. Gap reported a decline in sales and issued a profit warning; elsewhere, department store Macy’s issued a profit warning and reported a 7.4% drop in first-quarter sales.

The US economy posted first-quarter growth that was stronger than initial estimates suggested. The economy grew at an annualised rate of 0.8% during the period, compared with an earlier calculation of 0.5%. However, investors were disappointed by muted labour market data: the US economy created 160,000 new jobs during April, compared with a 12-month average of 232,000 new jobs per month. The rate of unemployment remained unchanged at 5% and average hourly earnings rose by 2.5% year on year. Consumer prices rose at an annualised rate of 1.1% during April, driven higher by rising energy costs.