2024 Weekly Update

Market update

The S&P 500 closed the week at 5,567.19, +1.95% higher. The Dow Jones closed at 39,375.87, +0.66%, with the Nasdaq higher by +3.50%. The volatility index VIX closed the week at 12.48, up from 12.44. The Euro Stoxx 600 rose +1.01%.

The 10-year UST closed at 4.28%, down from 4.40% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -110bps. US Corporate Bond spreads: Investment Grade spreads tightened -3bps at 164bps and High Yield spreads widened +2bps at 344bps. German 10-year Bunds yield closed at +2.55% up from +2.50% a week before. In Europe, Corporate Investment Grade spreads tightened -11bps at 122bps and High Yield tightened -17bps at 341bps.

The US Dollar Index (DXY) depreciated -0.94% last week and closed at 104.88. The Euro closed at 1.0840 (+1.19%); the Yen appreciated +0.08%, closing at 160.75 and the Swiss Franc appreciated +0.34%, closing at 0.8957. Gold closed at $2,392.16, appreciating +2.81%. Oil was higher, Brent closed at $86.54 (+0.15%) and WTI at $83.16 (+1.99%).

Macroeconomy

Jobs report

The Establishment survey showed a gain of 206k jobs in June, compared to the 190k forecast. Revisions were negative, with May and Apr being revised down by a combined 110k. The Household survey showed the number of employed people up 116k m-o-m. The unemployment rate ticked up to 4.1%, higher than the 4% forecast (and up from 4% in May). This was driven by a modest increase in the participation rate (from 62.5% to 62.6%). Wages were in line at +3.9% y-o-y and +0.3% m-o-m (the +3.9% is a modest downtick from +4.1% in May). The workweek length held steady at 34.3 hours (this was in line with the forecast). Weekly compensation advanced 3.5% y-o-y, less than the 3.9% increase in hourly wages.

Inflation in Europe

Euro area headline inflation fell from 2.6% to 2.5% in June, in line with consensus expectations. Core inflation was unchanged from May at 2.9%, 0.10% above expectations. Both services and core goods inflation were unchanged in June at 4.1% and 0.7% respectively. One positive development was a slowdown in price momentum according to the seasonally adjusted m-o-m growth rate of core prices, which fell from 0.4% to 0.2%. Interestingly, the decline was entirely due to a fall in the q-o-q growth rate for services prices, from 0.6% to 0.3%. Swiss headline inflation was slightly lower than expected at 1.3% y-o-y in June, down from 1.4% in May. The downside surprise mainly stemmed from imported inflation. From a monetary policy perspective, the SNB should view the June inflation print as support for its more dovish tone at the June meeting. Average inflation in Q2 at 1.4% is in line with the latest SNB conditional inflation forecast.

French elections

In France, the second round of the parliamentary elections showed the left-wing New Popular Front (NPF) securing the surprise outcome of being the largest group. They are in line to win 182 seats (around 160 expected in the final poll on Friday). The right-wing RN party and allies has claimed 143 seats (around 190 expected on Friday but edging lower all of last week). Macron’s ENS movement are looking set for 163 seats (around 135 expected on Friday). The tactical voting to block the right-wing RN has succeeded so much that it’s swung the pendulum in the opposite direction but without anyone having an overall majority which would have been 289 seats. The NPF have the most fiscally aggressive program in terms of both spending and taxation and the market will be suspicious that the prospect of them being in government now or later will bring higher deficits with the associated concerns about debt sustainability and tense relations with Europe. However, as parties now will need to find common ground to form a viable coalition, political paralysis seems the most likely outcome.

UK elections

The Labour Party comfortably won the general election on 4 July, returning to power for the first time since 2010. Keir Starmer became the new Prime Minister, and Rachel Reeves will replace Jeremy Hunt as the new Chancellor of the Exchequer. It secured a large majority despite a marginal increase in vote share, as the disparity between votes and seats reached significant levels. The Conservatives faced a historic loss, in part due to voters' growing dissatisfaction with the party’s handling of key economic issues and Liz Truss’s “mini-budget” of 2022. Despite the change in government, the Labour Party will have limited flexibility to implement radical changes as the tax burden is already high while fiscal headroom remains tight. However, the party has shown fiscal prudence, as Rachel Reeves mentioned earlier this year that it will not borrow to cover day-to-day spending and will aim to decrease the net debt to GDP ratio by 2028-29. Ahead of the next Budget, expected to be released in autumn, fiscal tightening is expected to remain in line with current projections.

US data

US economic data came on the weaker side. The ISM services index fell to 48.8 (vs. 52.7 expected), the weakest since May 2020, during Covid-19. Earlier, the June ISM manufacturing fell to 48.5 (vs. 49.1 expected). The subcomponents for new orders (49.3) and employment (49.3) contracted. The bright spot came from inflation, with the prices paid down to a 6-month low of 52.1. The latest jobless claims showed further deterioration, with the initial weekly claims up to 238k in the week ending June 29. That pushed the 4-week moving average up to 238.5k, which is the highest since August. Similarly, the continuing claims for the week ending June 22 were at 1.858m, which is the highest since November 2021. The ADP’s report of private payrolls showed private payrolls growth was at a 5-month low of +150k in June (vs. +165k expected). Finally, the Atlanta Fed’s GDPNow Q2 estimate was revised down to 1.5% y-o-y, in line with the 1.4% growth in Q1.

The Fed

The main takeaway from the June FOMC meeting was that Fed officials didn’t want to lower rates until “additional information had emerged to give them greater confidence” that inflation was moving toward the 2% target. While some officials noted that rates “might need to be raised” if inflation remained elevated or increased further, "the vast majority of participants assessed that growth in economic activity appeared to be gradually cooling, and most participants remarked that they viewed the current policy stance as restrictive”. This was balanced by future concerns “that inflation could stay elevated as a result of worsening geopolitical developments, heightened trade tensions, more persistent shelter price inflation, financial conditions that might be or could become insufficiently restrictive, or U.S. fiscal policy becoming more expansionary than expected”. Fed Chair Powell sounded positive about disinflation, saying that “inflation now shows signs of resuming its disinflationary trend”.

Highlights

Q2 earnings

Q2 earnings season is around the corner with JPM and other large financials reporting on Friday. The bar is high for S&P 500 companies as consensus expects EPS growth of +7.4%. On an equal weighted basis, expectations are slightly lower at +5.0% EPS growth. Investors continue to expect high earnings growth for tech mega-caps. The group consisting of AMZN, GOOG, NVDA, AAPL, MSFT, META is expected to grow +31.8% in Q2 although this is lower than the +68.2% growth rate from Q4 2023. Sector wise, energy is projected to report strong growth (+11.4%) while Materials and Telecom. are expected to report negative EPS growth (-9.2% and -4.2% respectively). So far, estimate revisions have been sideways in contrast to the usual downward move of 3% on average over the 3 months going into earnings.

What to watch

• Monday: Japan Labor Cash Earnings (May)

• Tuesday: Japan Mach. Tools orders (June); US NFIB Survey (June)

• Wednesday: US: New Home Sales (May)

• Thursday: Germany CPI (June); UK Ind. Production (May); US CPI (June), Jobless claims (July 6)

• Friday: France CPI (June); US PPI (June), Univ. Michigan Sentiment July)