United States
Stocks experienced a week of robust gains as investors responded positively to data indicating a continued decrease in inflation. The S&P 500 Index concluded the week finishing 6.50% below its previous record high achieved in early 2022. The Nasdaq Composite also witnessed significant gains, although it remained 12.94% below its peak performance. Notable performers within the S&P 500 included casino operators, regional banks, and asset managers. On the other hand, certain major pharmaceutical companies and the usually defensive consumer staples sector lagged. Earnings season unofficially commenced on Friday, with Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo reporting their second-quarter results, attracting significant attention.
The week’s pivotal event was the release of inflation data from the consumer price index (CPI) on Wednesday. Both headline and core inflation, excluding food and energy prices, rose by 0.2% in June, slightly below expectations. The annual increase in headline inflation slowed to 3.0%, the lowest pace since March 2021, while core inflation slowed to 4.8%, the slowest since October 2021.
The producer price index (PPI) inflation data, published on Thursday, provided even more encouraging results. Headline producer prices only rose by 0.1% over the year ending in June, approaching deflation levels. Core producer prices increased by 2.4% during the same period, aligning closely with the Federal Reserve’s overall inflation target of 2.0% and marking the slowest pace since January 2021.
Additional data released throughout the week indicated that the economy could avoid a recession as inflation cooled, indicating a “soft landing.” The University of Michigan’s measure of current consumer sentiment on Friday boosted the markets, surpassing expectations at 72.6, the highest level in nearly two years, and reflecting the most substantial monthly advancement since 2006. Surveyed consumers cited improved labour market conditions and declining inflation as factors contributing to their enhanced optimism. Weekly jobless claims, reported on Thursday, decreased more than anticipated to 237,000, essentially undoing the previous week’s surge.
Positive inflation data led to a retreat in longer-term yields, causing U.S. Treasury prices to soar, with the yield on the benchmark 10-year note falling below 4%. In the municipal bond market, supportive technical conditions persisted, driven by reinvestments from coupon payments and bond maturities, which generated robust demand for municipal bonds.
Early in the week, spreads in the investment-grade corporate bond market tightened, primarily influenced by more volatile issues.
Europe
The pan-European STOXX Europe 600 Index concluded the week with a significant 2.95% increase in local currency terms, marking its largest weekly gain in approximately three and a half months. The United States exhibited signs of inflation cooling, implying that interest rates might soon reach their peak. In the meantime, China implemented additional support measures for the property sector, instilling hope for potential economic stimulus. Major stock indexes across Europe demonstrated advancement, with France’s CAC 40 Index rising by 3.69%, Germany’s DAX adding 3.22%, Italy’s FTSE MIB gaining 3.19%, and the UK’s FTSE 100 Index growing by 2.45%.
European government bond yields declined as the slowdown in U.S. inflation fueled expectations that the Federal Reserve is approaching the conclusion of its tightening policy cycle. Although UK bond yields also decreased, the impact was mitigated by robust wage data.
The minutes from the European Central Bank’s (ECB) June meeting revealed support for further rate increases amid concerns over persistently high inflation. The minutes stated that it was crucial to communicate that monetary policy still had progress to make to bring inflation back to its target within an appropriate timeframe. The minutes also mentioned the possibility of considering interest rate hikes “beyond July” if necessary. However, most policymakers agreed with chief economist Philip Lane’s suggestion to adopt a “meeting-by-meeting approach,” particularly as rates approached a potential peak level.
According to the Office for National Statistics, the UK economy contracted by 0.1% sequentially in May following a 0.2% expansion in April. Economists polled by FactSet had anticipated a 0.4% contraction. On a rolling three-month basis, gross domestic product grew by 0.1%.
Excluding bonuses, UK wages experienced record annual growth of 7.3% in the three months leading up to May. However, the labour market displayed signs of easing as the jobless rate ticked up to 4% from the previous 3.8% recorded in the three months ending in April.
The Royal Institution of Chartered Surveyors reported in its June analysis that British homebuyers significantly reduced their engagement in the property market, marking the sharpest decline in eight months. This indicated that higher borrowing costs were impacting affordability. The measure of new buyer interest plummeted to -45% from -20% in May. In the meantime, the average rate for a two-year fixed mortgage loan rose to 6.66%, reaching its highest level since August 2008.
Japan
Japanese equities underperformed their Asian counterparts during the week, failing to benefit from a regional rally driven by positive developments in the Chinese technology sector and expectations of further Chinese stimulus. The Nikkei 225 Index remained unchanged, while the broader TOPIX Index experienced a 0.7% decline.
Anticipation grew that the Bank of Japan (BoJ) might adjust its yield curve control framework during its meeting on July 27-28, following its last modification in December 2022. This speculation exerted upward pressure on domestic yields, with the 10-year Japanese government bond (JGB) yield increasing from 0.44% to 0.47%, approaching the BoJ’s capped level of 0.50% for JGB yields.
The yen appreciated against the U.S. dollar, reaching around JPY 138 compared to the previous week’s JPY 142. This yen strengthening was driven by expectations of monetary policy normalisation and the possibility of the BoJ raising its inflation outlook for the current fiscal year in July. Conversely, the U.S. dollar encountered difficulties as U.S. producer prices grew less than anticipated in June. This development led investors to perceive a higher likelihood of the U.S. Federal Reserve nearing the end of its interest rate hiking cycle.
China
Following Beijing’s indication of measures to support the struggling Chinese economy, Chinese equities experienced a rally. The Shanghai Stock Exchange Index rose 1.29%, while the blue-chip CSI 300 increased by 1.92%. In Hong Kong, the benchmark Hang Seng Index surged by 5.71%.
Chinese officials announced extending two of the 16-point stimulus guidelines introduced in November last year to support the ailing property sector. These extended policies aim to postpone property development loans and encourage financial institutions to ensure project completion. They will remain in effect until the end of 2024.
Regarding corporate news, China’s financial regulators imposed a fine of over USD 1 billion on technology giants Ant Group and Tencent Holdings. This penalty was widely interpreted as concluding more than two years of investigations into China’s major internet companies and a broader crackdown on the tech sector. It raised concerns among investors about Beijing’s evolving approach to private enterprise.
On the economic front, China’s Consumer Price Index (CPI) remained unchanged in June compared to the previous year, marking the weakest reading since February 2021. Core inflation, which excludes volatile food and energy prices, decreased to 0.4% from the previous month’s 0.6%. The Producer Price Index (PPI) dropped to a rate of 5.4%, lower than expected, continuing its nine-month consecutive decline. These data indicate increasing deflation risks in China’s economy and provide further evidence of a weakening post-lockdown recovery.
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