United States
After a prominent “hawkish” Federal Reserve, policymakers appeared to dampen hopes that inflationary pressures had peaked, and stocks had taken back some of the previous week’s strong gains. The S&P 500 Index’s growth-oriented technology and communication services sectors underperformed, with the latter dragged down by a sharp decline in Facebook parent Meta Platforms. Summer trading was subdued, but there was some volatility Friday as USD 2.3 trillion in options expired.
Some positive surprises in the week’s economic data may have fuelled rate fears while providing hope that the economy would avoid a recession. In July, retail sales were 0.7% higher than expected after excluding the volatile gas and automobile segments. Notably, sales increased strongly despite the more minor 0.3% increase in core inflation (excluding food and energy).
Industrial production rose 0.6% in the month, roughly double the consensus estimate. Weekly jobless claims fell, defying expectations of an increase. On the negative side, housing data remained weak, and Target reported a sharp drop in earnings as shoppers continued to reduce discretionary spending.
In addition to the comments made by the Federal Reserve in its July meeting minutes, it influenced long-term bond yields as they rose. For the first time since July 10-year, bond yields have risen close to 3%. Municipal bonds rose as they underperformed, with selling pressures on AAA-rated one-year municipal bonds reaching their peak in months.
The secondary market for investment-grade corporate bonds was lower than daily averages, while primary issuance exceeded expectations. Credit-riskier segments, such as banking and technology, media, and telecommunications, underperformed, while short-maturity and higher-quality credits performed relatively well.
The EU/UK
European stocks fell on renewed fears that central banks would have to tighten their policies aggressively to combat persistently high inflation.
- The pan-European STOXX Europe 600 Index ended the week 0.80% lower in local currency.
- The majority of the major stock indices fell.
- The DAX Index in Germany fell 1.82%, the CAC 40 Index in France fell 0.89%, and the FTSE MIB Index in Italy fell 1.90%.
- However, the UK’s FTSE 100 Index rose as the pound fell against the US dollar as many of the index’s companies are multinationals with overseas revenues, therefore a weaker pound helps the index via FDIs (Foreign Direct Investments).
Core eurozone government bond yields rose following a double-digit increase in UK consumer prices and European Central Bank (ECB) official Isabel Schnabel’s comment that inflation could tick higher in the near term. Peripheral eurozone and UK government bond yields broadly tracked core markets.
The headline inflation rate in the United Kingdom reached 10.1% in July, the first double-digit reading since February 1982, owing to sharply higher food prices. According to a survey of economists, the year-over-year increase in consumer prices exceeded the 9.8% consensus forecast. The core rate, which excludes food and energy prices, rose to 6.2%, which was higher than expected.
Meanwhile, underlying wage growth in the United Kingdom increased at a 4.7% annual rate in the second quarter. When inflation is considered, regular wages fell 3.0%, the fastest drop since comparable records began in 2001. In the same period, unemployment increased by 0.1 percentage point to 3.8%. However, job vacancies in the three months to July were 1.27 million, a small decrease from record levels, indicating that the labour market remained tight.
In an attempt to curb inflation, Norway’s central bank raised its key interest rate by 0.5 percentage point to 1.75%. “The recent price rise has been broad-based, suggesting that inflation will remain high for longer than expected,” the Norges Bank said in a statement. “This suggests that the policy rate will rise faster than forecast in June.” The Bank stated that it intends to raise interest rates again next month.
japan
Japanese stocks rose sharply in the first half of the week as investors reacted to positive economic data from the United States released late last week. This has raised hopes that the Federal Reserve will be less aggressive in raising interest rates in the coming months. Indeed, despite a mixed bag of domestic economic releases and weak Chinese data raising concerns about slowing global growth, Japanese equity markets rallied on Wednesday, with the Nikkei 225 Index and the TOPIX both breaking through the psychological 29,000 and 2,000-point levels, respectively.
The optimistic mood was short-lived, as the minutes from the Federal Reserve’s July meeting, released on Thursday, indicated that rates would remain higher for longer. The minutes also reaffirmed the central bank’s intention to keep raising interest rates to return inflation to its long-term target of 2%. As a result, Japanese stock markets closed Thursday’s session significantly lower, giving up the previous session’s gains. Most sectors experienced weakness, particularly technology stocks, which tracked US peers in the tech-heavy Nasdaq Composite Index.
On Friday, Federal Reserve officials reiterated the need for additional interest rate hikes, ensuring that Japanese equities ended the session flat. However, the Nikkei 225 and the TOPIX finished the week slightly higher, gaining 1.3% and 1.1%, respectively.
According to the preliminary reading released by the Cabinet Office on Monday, Japan’s GDP increased by an annualized 2.2% in the second quarter of 2022. However, this fell short of the consensus estimate of 2.5% growth. According to the Ministry of Economy, Trade, and Industry, Japan’s industrial production increased more than expected in June. In June, industrial production increased by a seasonally adjusted 9.2%, exceeding expectations of 8.9%. respectively.
Meanwhile, official data showed that inflation in Japan remained above the 2% target, owing to higher fuel prices and a weaker yen. Core inflation increased to 2.4%, up from 2.2% the previous month, excluding fresh food which was in line with the consensus. For the fourth month in a row, core inflation has exceeded the central bank’s 2% target.
Bullard’s remarks aided the dollar’s gains against the Japanese yen. The yen began the week around JPY 133.5 versus the USD, but weakened toward the end of the period, eventually closing at JPY 136.7. Meanwhile, the benchmark 10-year JGB (Japan Government bond) yields rose during the week, rising from 0.184% on Monday to 0.191% by Friday’s close.
China
China’s stock markets fell for the week because of weak economic data and increased COVID cases, with drought conditions in parts of the country adding to the gloom. According to Reuters, the broad, capitalisation-weighted Shanghai Composite Index fell 0.6%, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1%.
Bloomberg reported that it was China’s worst seven-day period in terms of COVID infections since mid-May, with more than 18,000 new local cases recorded. The government also issued a national drought warning as high temperatures threatened crops and industrial activity from Sichuan in the southwest to Shanghai in the Yangtze Delta. The extreme heat has caused power outages and forest fires
The 10-year Chinese government bond yield fell sharply after the People’s Bank of China (PBOC), China’s central bank, unexpectedly cut a key interest rate. The PBOC lowered its seven-day reverse repo rate—the main rate at which it provides short-term liquidity to banks—to 2.00% from 2.10% and the one-year Medium-Term Lending Facility (MLF) rate to 2.75% from 2.85%.
The yuan struck a three-month low versus the dollar, as the currency reacted to soft economic data and tracked the central bank’s weakened midpoint guidance. The PBOC allows the exchange rate to rise or fall 2% from the official midpoint rate it sets each morning.
Indices this week
|
|
Weekly Index |
|
YTD Index |
|
|||
|
Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
|||
|
UK |
|
|
|
|
|||
|
FTSE 100 Index |
0.80% |
0.80% |
5.17% |
5.17% |
|||
|
US |
|
|
|
|
|||
|
S&P 500 Index |
-1.18% |
1.46% |
-10.66% |
2.52% |
|||
|
Europe |
|
|
|
|
|||
|
Euro Stoxx 50 |
-1.23% |
-0.61% |
-11.27% |
-10.09% |
|||
|
Asia |
|
|
|
|
|||
|
Nikkei 225 Index |
1.34% |
1.46% |
0.48% |
-3.50% |
|||
|
Hang Seng Index |
-1.88% |
0.63% |
-13.33% |
-1.17% |
|||
|
MSCI Emerging Markets Index |
-0.64% |
1.15% |
-12.17% |
-4.66% |
|||
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