Weekly Market Recap

Headline annual inflation in the UK held steady at 2% in June, partly due to a meaningful decline in energy costs compared with last year. Core inflation, excluding energy and food, remained at 3.5%. Services inflation, which is closely watched by policymakers, stayed at 5.7%.

Average earnings, excluding bonuses, grew by an annual 5.7% in the three months to May, down from 6.0% in April and the lowest level since mid-2022. However, the indicator remained close to double the rate, consistent with the Bank of England’s 2% inflation target.

The week’s economic calendar generally surprised on the upside. Most notably, perhaps, retail sales, excluding the volatile gas and auto segments, jumped 0.8% in June, well above consensus and the most since January 2023. Building permits rose 3.4% in June, also more than expected, putting an end to three consecutive monthly declines. Similarly, the Federal Reserve (Fed) reported on Wednesday that industrial production had increased 0.6% in June, roughly double estimates. On Thursday, the Philadelphia Fed reported that its gauge of current regional business conditions had jumped to its highest level in three years.

The Labor Department’s report of weekly jobless claims was the outlier, with the number of Americans filing for unemployment increasing to 243,000, rebounding to the nine-month high it established for the week ended 8 June. More concerning may have been a 20,000 increase in continuing claims to 1,867,000, the highest number since November 2021.

Fed Chair Jerome Powell addressed the central bank’s dual mandate during a speech on Monday, saying, “Now that inflation has come down and the labour market has indeed cooled off, we’re going to be looking at both mandates. They’re in much better balance.”

The European Central Bank (ECB) kept its key interest rates unchanged at 3.75%, as expected. It said it would not pre-commit to any rate path, emphasising that economic data would guide its decisions. ECB President Christine Lagarde said a move in September was “wide open,” adding that risks to economic growth were “tilted to the downside” and that inflation would fluctuate at current levels for the rest of the year before declining in the second half of 2025.

The ECB’s Bank Lending Survey for the three months through June showed household loan demand expanded for the first time in two years amid easier conditions on mortgages and optimism about the housing market. The banks taking part in the poll indicated that they expect this trend to continue in the third quarter.

Industrial production in the euro area in May fell -0.6% sequentially, declining for the first time since January, according to Eurostat. However, output dropped -2.9% year on year (YoY), with steep falls in Germany, Italy and France.

China’s GDP expanded a below-consensus 4.7% in the second quarter from a year earlier, slowing from the 5.3% growth in the first quarter. On a quarterly basis, the economy grew 0.7%, less than half of the first quarter’s revised 1.5% expansion.

Other data also highlighted weakness in the economy. Retail sales grew a below-forecast 2% in June from a year earlier, down from a 3.7% increase in May, partly driven by lower autos and household appliances sales. Industrial production rose a better-than-expected 5.3% in June from a year earlier but slowed from May’s 5.6% increase. Fixed asset investment rose 3.9% in the January-to-June period from a year ago, in line with forecasts, though property investment fell -10.1% YoY. The urban unemployment rate remained steady at 5%, while the youth jobless rate dropped to 13.2%, the lowest level since December.
China’s new home prices fell -0.7% in June, matching May’s -0.7% drop and extending losses for the 12th consecutive month, according to the statistics bureau. The data suggested that a historic property rescue package unveiled by Beijing in May has done little to turn around the property market slump, which has emerged as a major growth headwind, leaving the economy dependent on exports for growth.

Amid speculation about whether the Bank of Japan (BoJ) could hike interest rates at its 30-31 July meeting, at the same time as it set to provide detail on the tapering of its massive bond purchases, the yield on the 10-year Japanese government bond declined to 1.04%, from 1.06% at the end of the prior week.

The yen strengthened to JPY 157.5 against the USD from the previous week’s 157.8. The Japanese currency’s second successive weekly gain came after recent suspected yen-buying operations by the government. Japan’s top currency official, Masato Kanda, suggested that there needs to be a response if speculators cause excessive foreign exchange moves. However, authorities typically refrain from immediately confirming whether a currency intervention has taken place, with data due to be released on the final day of July.

On the economic data front, the closely watched nationwide core consumer price index (CPI) rose 2.6% YoY in June, up from 2.5% YoY in May but slightly short of consensus estimates of a 2.7% YoY increase. The overall inflation rate, which had been expected to rise, held steady at 2.8% YoY.

Japan’s economic fragility was highlighted by the government lowering its GDP growth forecast for the current fiscal year ending March 2025 to a 0.9% expansion, from a gain of 1.3% projected in January. Much of the downgrade was attributable to sluggish domestic consumption amid rising import costs resulting from the weakness of the yen, which erodes households’ purchasing power. The government also presented its outlook for the fiscal year beginning April 2025, with the economy expected to achieve demand-led growth of 1.2%.

Australian employment growth rose 50,200 in June, notably above market expectation of 20,000. However, the unemployment rate increased from 4.0% to 4.1% as the employment strength was largely driven by immigration-led population growth. Total hours worked grew 0.8% month over month, offsetting falls in the previous two months. This leaves the second-quarter CPI the key indicator to watch before the next meeting of the Reserve Bank of Australia (RBA).

Last week, the MSCI All Country World Index (MSCI ACWI) retreated -2.1% (12.9% YTD).

In the US, the S&P 500 Index recorded a loss of -1.9% (16.3% YTD). The major indexes ended mixed in a week that saw a continued rotation in market leadership to small-cap and value shares. The narrowly focused Dow Jones Industrial Average outperformed, and value stocks outpaced growth stocks by 462 basis points (bp), as measured by Russell indexes. The Russell 1000 Growth Index returned -3.9% (19.8% YTD), Russell 1000 Value Index 0.7% (9.9% YTD) and Russell 2000 Index 1.7% (8.6% YTD). The technology-heavy Nasdaq Composite dropped -3.6% (18.6% YTD).

The week was also notable for a widespread global disruption to computer systems early Friday due to an error in a vendor’s security update to some users of the Microsoft operating system. The problems seemed to have little impact on US trading, however.

A major factor in the underperformance of growth stocks was a sharp decline in chip stocks on Wednesday, following news that the Biden administration had told allies it was considering severe export curbs if companies such as Tokyo Electron and the Netherlands’ ASML Holding continued providing China with access to advanced semiconductor technology. Chip giants Taiwan Semiconductor Manufacturing, Broadcom and NVIDIA (the third-largest company by market capitalisation) also fell sharply.

Polls showing an increasing likelihood of a Republican sweep in the November elections appeared to favour value stocks. The prospect of lighter banking regulation seemed to provide a boost to the value-oriented financials sector, for example, while the prospect of higher tariffs under a Trump administration may have favoured industrials and business services shares.

In Europe, the MSCI Europe ex UK Index fell -3.1% (7.9% YTD) amid rising trade tensions between the US and China. Major stock indexes retreated. Germany’s DAX Index dropped -3.1% (8.5% YTD), France’s CAC 40 Index lost -2.4% (2.7% YTD) and Italy’s FTSE MIB Index slid -1.1% (17.0% YTD). Switzerland’s SMI Index gave back -1.6% (12.7% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.09 for EUR.The FTSE 100 Index declined -1.2% (7.8% YTD) and the FTSE 250 Index pulled back -0.6% (9.0% YTD). The British pound weakened versus the US dollar, ending the week at USD 1.29 for GBP, down from 1.30.

Japan’s stock markets lost ground over the week. The TOPIX Index decreased -1.2% (22.3% YTD) and the TOPIX Small Index retreated -0.7% (14.5% YTD). Technology stocks suffered on rising concerns about tighter US restrictions on exporters of advanced semiconductor technology to China, including several Japanese chip makers.

In Australia, the S&P ASX 200 Index added 0.2% (7.6% YTD). Investors’ speculation of a higher chance of an RBA rate hike in August after the strong June employment data largely offset the positive sentiment from the expectation of more Fed cuts this year. Australian government bond yields moved lower after the continued dovish narratives by Fed members. The Australian dollar partially reversed the loss in previous weeks, finishing -1.2% weaker versus the US dollar.

MSCI Emerging Markets Index fell -3.0% (8.4% YTD), with a positive contribution to performance from the stock markets of China and India and a negative contribution from those of Taiwan, South Korea and Brazil. 

Chinese equities rose as investor sentiment was largely unaffected by weaker-than-expected economic growth in the second quarter. The Shanghai Composite Index increased 0.9% (2.5% YTD) and the blue-chip CSI 300 Index moved up 2.2% (5.3% YTD). In Hong Kong, the benchmark Hang Seng Index dropped -4.8% (5.5% YTD).

In South Africa, the South African Reserve Bank’s monetary policy committee held its scheduled meeting and kept the key interest rate, the repurchase rate, unchanged at 8.25%. The decision to hold rates steady, which was widely expected, was not unanimous. Four policymakers voted to keep rates unchanged, while two dissenters preferred a 25bp rate cut.

In the post-meeting statement, policymakers characterised the economy in the first half of the year as “disappointing,” and while they project “somewhat faster growth” in the medium term, they expect growth will remain “below longer-run historical averages.” As for inflation, policymakers noted the 5.2% reading in May and believe that the outlook for inflation “has improved somewhat.” They anticipate inflation will “dip below the 4.5% midpoint” of their inflation target range over the “next few quarters” due to easing food and fuel costs.

Nevertheless, central bank officials felt that the balance of risks was skewed to the upside, which prompted them to keep short-term interest rates unchanged. They specifically cited electricity inflation and “uncomfortably” elevated services price inflation as areas of concern.

In Brazil, late the previous week, the government reported that inflation in June was measured at a month-over-month rate of 0.21%. This was lower than expected. According to T. Rowe Price analysts, the underlying details of the inflation report were constructive as well, as core measures surprised on the downside, as well as the labour-intensive services measure that the central bank is watching carefully.

While inflation could pick up in the months ahead – due in part to a recent increase in electricity and gasoline prices – benign base effects could help keep the YoY core inflation rate fairly stable around 3.5%, thus enabling the central bank to keep the Selic rate at its current level of 10.5% for the time being.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) was broadly flat (1.1% YTD), Bloomberg Global High Yield Index (hedged to USD) was little changed (5.1% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index lost -0.4% (3.1% YTD).

The yield on the benchmark 10-year US Treasury note seemed to fall alongside inflation concerns over much of the week before spiking Friday in seeming reaction to worries over the Microsoft disruptions. Over the week, the 10-year yield rose 6bp to 4.24% from 4.18% (up 36p YTD). The 2-year Treasury yield increased 6bp to 4.51% from 4.45% (up 26bp YTD).

The level of issuance in the US investment-grade corporate bond market surpassed expectations for the week, although the majority was oversubscribed. Most sectors closed with spreads unchanged to a touch tighter throughout the week. High yield bonds traded higher amid the stronger macro backdrop as rates rallied due to the market viewing the prospect of Fed rate cuts sooner than December as more likely. After a slow start, trade volumes increased as demand became stronger. However, issuance was subdued throughout the week.

Over the week, the 10-year German bund yield decreased -2bp, ending at 2.47% from 2.49% (up 45bp YTD).

The 10-year UK gilt yield rose 1bp, ending the week at 4.12% from 4.11% (up 59bp YTD).