United States
Major U.S. equity indexes mostly advanced on optimistic expectations that the tight labour market and moderating inflation would safeguard the economy from a hard landing. However, the tech-heavy Nasdaq Composite experienced a minor pullback, while value stocks outperformed their growth counterparts in the large-cap Russell 1000 Index.
In June, retail sales showed a modest increase of 0.2% sequentially, falling short of the 0.6% consensus estimate from FactSet. Nonetheless, upward revisions to May’s data raised its growth rate to 0.5% from the initial reading of 0.3%.
On the employment front, new filings for unemployment benefits declined for the second consecutive week, surpassing economists’ expectations. Initial claims reached their lowest level since May, indicating some positive trends in the labour market.
U.S. Treasury Secretary Janet Yellen expressed confidence that the U.S. would not slip into recession, citing the resilience of the labour market and the slowdown in inflation. However, the Conference Board’s Leading Economic Index, a forward-looking indicator of U.S. economic activity, declined for the 15th consecutive month in June, signalling potential economic weaknesses. This was primarily attributed to consumer sentiment, new order weaknesses, and a slowdown in housing construction.
In the bond market, two-year U.S. Treasury note yields increased, while the benchmark 10-year U.S. Treasury note yield remained relatively unchanged. This led to a further inversion of the yield curve, indicating investors’ anticipation of another Federal Reserve rate hike during the central bank’s July 25–26 policy meeting. In contrast, the tax-exempt municipal bond market saw positive momentum, with demand bolstered by reinvestments from coupon payments and bond maturities, along with strong oversubscription for new deals.
Europe
The pan-European STOXX Europe 600 Index concluded the week with a 0.95% gain in local currency terms, buoyed by hopes that evidence of slowing inflation could signal an eventual end to monetary policy tightening. Modest increases were observed in most major Continental stock indexes. Italy’s FTSE MIB advanced 0.67%, France’s CAC 40 Index gained 0.79%, and Germany’s DAX added 0.45%. The UK’s FTSE 100 Index saw a notable climb of 3.08%, supported in part by the depreciation of the British pound against the U.S. dollar. The inclusion of many multinational companies with overseas revenues in the index contributed to its growth.
European government bond yields trended lower, reflecting the impact of cooling inflation in both the U.S. and the UK. This development raised expectations that major central banks might be nearing the end of their monetary policy tightening. Yields on Italy’s 10-year sovereign bonds briefly dipped below a one-month low of 4%, while in the UK, yields on 10-year government bonds declined following encouraging inflation figures.
In the UK, annual consumer price growth slowed to 7.9% in June, down from 8.7% in May, largely due to decreased gasoline prices. The magnitude of this slowdown in inflation exceeded consensus estimates and aligned with the Bank of England’s forecast. BoE Deputy Governor David Ramsden acknowledged the significant decline in CPI inflation but emphasised that it still remains too high. The Monetary Policy Committee addresses the risks of persistent strength in domestic wage and price settling.
Revised figures revealed that the eurozone economy avoided a recession in the year’s first quarter. Initially estimated to contract by 0.1%, the revised data showed that the gross domestic product remained unchanged, indicating stabilisation in economic conditions.
In the European Central Bank (ECB), two influential hawks, Dutch central bank governor Klaas Knot and Bundesbank chief Joachim Nagel, seemed to temper their stance on future interest rate increases. Knot noted that core inflation had “plateaued,” and while the possibility of raising interest rates beyond July exists, it is by no means certain. Nagel, who previously advocated for more rate hikes, stated that whether to raise rates in September would hinge on incoming economic data.
Japan
During the week, Japan’s stock markets displayed mixed performance, with the Nikkei 225 Index declining by 0.3%, while the broader TOPIX Index gained 1.0%. Investors cautiously anticipated the Bank of Japan’s (BoJ’s) July 27–28 monetary policy meeting. Expectations that the central bank would adjust its yield curve control (YCC) framework slightly diminished, influencing market sentiment.
The BoJ faced pressure to tighten its policy and raise inflation forecasts due to a notable increase in June’s core consumer price inflation, which aligned with consensus expectations.
Amidst these developments, the 10-year Japanese government bond yield saw a marginal increase, rising to 0.48% from the previous week’s 0.47%. Additionally, the Japanese yen weakened against the U.S. dollar, trading at around JPY 141.82 compared to approximately JPY 138.76 the previous week.
The government’s midyear economic forecast updates indicated a downward revision in Japan’s economic growth forecast for the fiscal year starting April 1, from 1.5% to 1.3%. However, it raised the total consumer price inflation forecast for the 2023 fiscal year to 2.6%, up from the previously predicted 1.7%. Observers widely anticipate that the BoJ will also increase its inflation forecasts during its July monetary policy meeting.
Japan’s inflation exceeded the BoJ’s 2% target, as evidenced by the 3.3% year-on-year rise in the core consumer price index in June, slightly higher than the previous month’s 3.2% increase.
BoJ Governor Kazuo Ueda’s comments, as reported by Reuters, tempered expectations of immediate monetary policy normalisation. Ueda stated that achieving the central bank’s 2% inflation target sustainably still requires further progress. The BoJ will continue its patient approach, closely evaluating progress towards the inflation target at each policy meeting while maintaining its ultra-loose monetary policy under YCC.
China
Chinese equities experienced a retreat as the latest economic data indicated a slowdown in growth. The Shanghai Stock Exchange Composite Index plummeted by 2.16% in local currency terms, while the blue-chip CSI 300 declined by 1.98%. Similarly, the Hang Seng Index fell by 1.74% in Hong Kong.
China’s gross domestic product expanded by 6.3% year-over-year in the second quarter, which was below expectations but showed a faster growth rate than the 4.5% recorded in the first quarter. However, every quarter, the economy only grew by 0.8%, a notable decline from the 2.2% expansion in the first quarter. Quarterly readings provide a clearer picture of underlying growth in China compared to a year ago when cities like Shanghai were under pandemic lockdown. While unemployment remained stable at 5.2% in June, youth unemployment surged to a record 21.3%.
To boost corporate confidence amid the faltering recovery, the Chinese government made commitments to enhance conditions for private businesses, as stated in a release on Wednesday. Additionally, Chinese authorities unveiled an 11-point consumption plan to bolster household spending.
In the real estate sector, China witnessed stable new home prices after a brief recovery earlier in the year, with no change in prices last month following a 0.1% increase in May. However, property investment declined by 7.9% during the January-to-June period, showing signs of weakness due to poor consumer sentiment and persistent deflationary pressures. This decline was more pronounced than the 7.2% drop recorded in the year’s first five months.
Market indices
|
Index |
Weekly Index |
Year to Date |
||
|
Currency |
Local |
Sterling Pound |
Local |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
3.08% |
3.08% |
5.06% |
5.06% |
|
US |
|
|
|
|
|
S&P 500 Index |
0.69% |
2.83% |
18.91% |
11.35% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
-0.20% |
0.75% |
18.25% |
15.31% |
|
Asia |
|
|
|
|
|
Hang Seng Index |
-1.74% |
0.30% |
1.27% |
-5.32% |
|
MSCI World |
0.70% |
2.24% |
16.85% |
10.02% |
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