2024 Weekly Update

Market update

The S&P 500 closed the week at 5,460.48, -0.08% lower. The Dow Jones closed at 39,118.86, -0.08%, with the Nasdaq higher by +0.24%. The volatility index VIX closed the week at 12.44, down from 13.20. The Euro Stoxx 600 fell -0.72%.

The 10-year UST closed at 4.40%, up from 4.26% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -96bps. US Corporate Bond spreads: Investment Grade spreads widened +3bps at 167bps and High Yield spreads remained at 342bps. German 10-year Bunds yield closed at +2.50% up from+2.41% a week before. In Europe, Corporate Investment Grade spreads tightened -1bp at 133bps and High Yield widened +2bps at 358bps.

The US Dollar Index (DXY) appreciated +0.07% last week and closed at 105.87. The Euro closed at 1.0713 (+0.19%); the Yen depreciated -0.68%, closing at 160.88 and the Swiss Franc depreciated -0.55%, closing at 0.8988. Gold closed at $2,326.75, appreciating +0.21%. Oil was higher, Brent closed at $86.41 (+1.37%) and WTI at $81.54 (+1.00%).

Macroeconomy

US inflation

Friday data added to the evidence of US inflation cooling in Q2. The headline PCE (Personal consumption expenditures or consumer spending) index moved sidewards in May (+0.0% as expected) m-o-m, bringing the y-o-y rate to +2.6% (as expected) from +2.7%. Core PCE decelerated to +0.1% on the month, in line with consensus but a soft +0.08% unrounded. The +2.6% y-o-y core PCE pace (also as expected) was the lowest since April 2021. The data also sent a mostly healthy signal on the US consumer, with the personal income indicator rising to 0.5% (vs 0.4% expected) while real personal spending rose from -0.1% to 0.3% (as expected).

Global inflation

Canada’s May CPI report showed headline CPI unexpectedly rising to +2.9% (vs. +2.6% expected), and the two core inflation measures followed by the Bank of Canada also rose. As it happens, the Bank of Canada did announce an initial cut at their meeting earlier this month, but after the inflation report, investors swiftly moved to dial back the chance of a follow-up move in July. Indeed, overnight index swaps had been pricing a 61% chance of a July cut on the previous day, but that was down to 16% by the end of the week. In Australia, the latest CPI reading surged to its highest level this year. It printed at +4.0% y-o-y in May, above market expectations for a +3.8% gain and up from +3.6% in April. Following the CPI data, the Australian dollar has risen and closed the week at 0.6670 versus the dollar.

US data

The third estimate of US Q1 GDP was revised up a tenth, and now shows growth at an annualized +1.4%. However, both headline and core PCE were revised up a tenth as well, with core PCE inflation now seen at an +3.7% y-o-y in Q1. The continuing jobless claims rose to 1.839m in the week ending June 15 (vs. 1.828m expected), which is their highest level since November 2021. US new home sales fell to an annualized rate of 619k in May (vs. 633k expected), which is their lowest level in 6 months. Alongside that, the weekly initial jobless claims over the week ending June 22 came in at 233k (vs. 235k expected). That was a bit lower than last week, but it still pushed the 4-week moving average up to 236k, which is the highest since September. That adds to several metrics suggesting that the labor market could be weakening, not least given the unemployment rate was up to 4.0% in the May jobs report. So evidence of loosening in the labor market even if there are enough one-offs in the data to give it a pass for the moment. Also weak, core capital goods orders for May disappointed, falling -0.6% (vs. +0.1% expected), while a gauge of pending home sales fell to its lowest level since the start of the series in 2001. The Atlanta Fed’s GDPNow estimate for Q2 was cut to a rate of +2.7% y-o-y, having been at +3.0% previously.

French elections

The first round of the French legislative election took place on Sunday. Le Pen’s National Rally look set to win around 34.2% of the vote, slightly underperforming the final poll of polls which had them at 36.2%. The left-wing NPF coalition are expected to be at around 29% slightly outperforming their final poll of polls of 28.3%. Macron’s party is on track for around 21% also a bit above the final poll of polls of 20.4%. In terms of what happens next, all those candidates that have an absolute majority of votes and a vote greater than 25% of the electorate is elected. For those not crossing the threshold, the second round this coming Sunday is a run-off between the top two candidates plus any other candidates who polled more than 12.5% of registered voters. Then the one with the most votes is elected. The left alliance has said it will remove candidates that are in third place which will be problematic to the Far Right’s chances of a majority. Over half the 577 parliamentary seats, a historically very high number, are expected to go to the second round with lots of tactical voting now likely. In terms of seats projected in the National Assembly, that poll suggests the National Rally and its allies would end up with 220-260 seats, falling short of the 289 necessary for a majority. Alongside that, the left-wing alliance would get 180-210 seats, and President Macron’s group would be on 75-110.

Highlights

On rates

US Treasuries saw selling pressure last week with 10yr and 2yr yields rising +14.0bps and +2.1bps respectively. Although Treasuries rallied during the week following underwhelming economic data and negative consumer earnings report, they suffered steep losses on Friday. 10yr yields were up +11.0bps on the day to 4.40% while 2yr yields rose +4.2bps to 4.75%. The odds of a cut by 9/18 are unchanged at 70-75% and 45-50bps worth of reductions are expected for the year. In Europe, bonds struggled in the lead up to the first round of the French election that took place Sunday. The 10yr French OAT yield was up +8.9bps to 3.30%, its highest level since mid-November. In Germany, 10yr bunds were up by +8.9bps on the week.

What to watch

• Monday: Japan Tankan Survey (2Q); Germany CPI (June, prel.); US ISM Manufacturing (June); Switzerland PMI Manuf. (June); China PMI (June)

• Tuesday: Eurozone: CPI (June, prel.), Unemployment rate (May); US JOLTS Job Openings (May)

• Wednesday: US ADP Employment (June), Trade Balance (May), Factory Orders (May), ISM Services Index (June), FOMC Meeting Minutes (June 12)

• Thursday: Germany Factory Orders (May); Switzerland Unemployment Rate (June), CPI (June); US Independence Day, financial markets closed

• Friday: Germany Industrial Production (May); Eurozone Retail Sales (May); US Nonfarm Payrolls (June); Sunday French Election 2nd Round