United States
Growth stocks fared slightly better than value shares, with Tesla and Rivian, both prominent in the Nasdaq Composite and growth indices, providing a boost. Tesla exceeded sales expectations, while Rivian, its smaller electric vehicle competitor, also contributed to the positive sentiment. On the other hand, disappointing trial results for AstraZeneca’s new lung cancer drug weighed down the healthcare sector.
The primary factor impacting market sentiment during the week was the release of the Federal Reserve’s meeting minutes on Wednesday. While the decision to keep rates unchanged in June was unanimous, some members expressed a preference for an increase. This deepened the belief that interest rates would remain higher for a longer period. Dallas Fed President Lorie Logan, who advocated for a rate hike in June, further reinforced this expectation by stating that she anticipated two more rate increases in the remainder of the year during a Central Bank Research Association gathering on Thursday. As a result, markets began factoring in a roughly 44% probability of two or even three quarter-point rate hikes by December, according to the CME FedWatch Tool.
However, this probability decreased to around 36% by the end of Friday, likely in response to data indicating a slowdown in the job market. The Labor Department reported that nonfarm job additions in June were 209,000, slightly below expectations and the lowest figure since December 2020. The previous two months’ job gains were also revised downward by a total of 110,000 jobs. The unemployment rate decreased from 3.7% in May to 3.6% in June. The report also highlighted a roughly 11% increase in the number of people employed part-time for economic reasons in June, which partially reflected an increase in individuals facing reduced work hours due to slack work or business conditions.
Furthermore, the week demonstrated contrasting job markets for factory and service workers. The Institute for Supply Management’s (ISM’s) Manufacturing Purchasing Managers’ Index (PMI), released on Monday, indicated a renewed slowdown in job growth, with hiring trends in the sector contracting for the first time since March. Conversely, the ISM’s services employment gauge painted a different picture, reaching its highest level (53.1, with numbers above 50 indicating expansion) since February. The overall Services PMI reached its highest level (53.9) since February, surpassing estimates.
Europe
The pan-European STOXX Europe 600 Index declined by 3.09% in local currency terms, driven by concerns over central banks potentially tightening monetary policy. Investors were disappointed by the lack of specific measures to support the Chinese economy, despite government officials making promises of assistance. Major stock indexes in Europe experienced declines, with Germany’s DAX dropping by 3.37%, France’s CAC 40 Index sliding by 3.89%, Italy’s FTSE MIB giving up 1.60%, and the UK’s FTSE 100 Index dropping by 3.65%.
Yields on European government bonds increased, including the benchmark German 10-year bond surpassing 2.6%. French and Italian bond yields also rose, while in the UK, yields reached their highest levels since mid-2008.
German economic data for industrial production, factory orders, and exports indicated ongoing weakness in the second quarter. Industrial output in May fell by 0.2% compared to April, disappointing consensus expectations of no change. New orders experienced a significant increase of 6.4% in May, driven by demand for ships, spacecraft, and military vehicles. However, on a three-month basis, this metric was still down by 6.1% sequentially. Exports remained volatile, unexpectedly shrinking by 0.1% monthly, while imports increased by 1.7% in May.
In the Eurozone, factory gate prices declined by 1.9% sequentially in May, primarily due to lower energy costs, according to the European Union’s statistics office. Retail sales volumes in the Eurozone remained flat for the second consecutive month in May, as increased spending on non-food items offset food and automotive fuel sales declines. On a year-over-year basis, retail sales experienced a decline of 2.9%, marking the eighth consecutive monthly decrease.
Inflation expectations for the next 12 months among consumers moderated further in May, according to the European Central Bank’s monthly survey. Survey participants anticipate inflation at 3.9% in a year’s time, down from 4.1% in April.
ECB President Christine Lagarde maintained her hawkish stance, stating in an interview with a French regional newspaper that policymakers still have work to curb inflation, which is projected to exceed the 2% target in 2024 and 2025.
According to home loan provider Halifax, rising mortgage rates continued to impact the UK housing market in June, as house prices declined by 2.6% year over year. This marked the largest decline in house prices since 2011.
Japan
Over the week, Japan’s stock markets experienced a decline, with the Nikkei 225 Index recording a loss of 2.4% and the broader TOPIX Index down by 1.5%. Both indexes retreated from their 33-year highs as investors sought to lock in profits, particularly in the technology sector, which had performed strongly. Investor sentiment was dampened by growing expectations of an interest rate hike by the U.S. Federal Reserve in the second half of the year. However, the Bank of Japan’s ultra-accommodative monetary policy and the yen’s historic weakness, which continued to benefit Japan’s export-oriented firms, helped cushion the losses.
The yield on the 10-year Japanese government bond (JGB) increased from 0.39% to 0.44% by the end of the week. There were speculations that the Bank of Japan could adjust its yield curve control policy at its July meeting, potentially allowing JGB yields to fluctuate beyond the current range of around plus and minus 0.5 percentage points from zero. This speculation exerted some upward pressure on domestic yields. However, BoJ Deputy Governor Shinichi Uchida, as reported by the Nikkei newspaper, stated that the central bank will maintain its yield curve policy. Uchida acknowledged the side effects of the policy on market functioning but emphasized the BoJ’s commitment to supporting the economy.
The Japanese yen strengthened against the U.S. dollar, with the exchange rate around JPY 143 compared to approximately JPY 144 in the previous week. This came as expectations diminished regarding intervention by the Bank of Japan to bolster the Japanese currency in foreign exchange markets. Finance Minister Shunichi Suzuki mentioned that Japanese and U.S. authorities were closely monitoring currency movements. Japan’s monetary authorities have previously stated that they are prepared to take necessary measures to address excessive volatility in foreign exchange markets.
Nominal wages in Japan saw a year-on-year increase of 2.5% in May, surpassing expectations, following the spring “shunto” labour talks concluded in March that secured significant pay raises, the largest in decades. However, households still experienced a decline in real (inflation-adjusted) terms, which weighed on consumption. The Bank of Japan closely monitors wage growth, aiming for it to become sustainable, with next year’s shunto negotiations in sight. The central bank remains determined to achieve its 2% inflation target alongside rising wages.
China
Chinese stocks experienced a retreat as the latest economic data raised concerns about the country’s post-pandemic recovery, which has been faltering. The Shanghai Stock Exchange Index fell by 0.17%, while the blue-chip CSI 300 lost 0.44%. In Hong Kong, the benchmark Hang Seng Index plunged by 2.91%. The private Caixin/S&P Global survey of manufacturing activity indicated a slowdown, with the index easing to 50.5 in June from May’s 50.9, reflecting softer expansion in manufacturing output and new orders. Readings above 50 signify growth, while those below 50 indicate contraction.
The Caixin survey of services activity also declined to a lower-than-expected 53.9 in June, down from May’s 57.1. Although it marked the sixth consecutive month of expansion, it was the lowest reading since January. The weak Caixin data aligned with the official Manufacturing Purchasing Managers’ Index, which contracted for the third consecutive month in June.
Premier Li Qiang, the second-highest-ranking official in the country, pledged to swiftly implement a series of targeted policies to strengthen China’s post-pandemic recovery. Li emphasized that China is at a critical stage of economic recovery and industrial upgrading, and comprehensive and well-coordinated measures are necessary to stabilize growth and employment. However, specific details regarding these measures were not provided.
In central bank news, Pan Gongsheng, the deputy governor of the People’s Bank of China, was appointed as the top Communist Party official at the central bank. According to unnamed sources cited by The Wall Street Journal, this move positions Pan to potentially become the central bank’s next governor. Economists interpreted the appointment as reinforcing policy stability, aligning with the central bank’s current approach of modest interest rate cuts and encouraging targeted lending by banks.
Market indices
|
Index |
Weekly Index |
Year to Date |
||
|
Currency |
Local |
Sterling Pound |
Local |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
-3.64% |
-3.64% |
-0.59% |
-0.59% |
|
US |
|
|
|
|
|
S&P 500 Index |
-1.13% |
-1.98% |
15.28% |
8.14% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
-3.64% |
-4.12% |
12.18% |
7.96% |
|
Asia |
|
|
|
|
|
Hang Seng Index |
-2.03% |
-2.77% |
-2.51% |
-8.82% |
|
MSCI World |
-1.58% |
-2.25% |
13.09% |
6.25% |
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