2024 Weekly Update

Market update

The S&P 500 closed the week at 5,615.35, +0.87% higher. The Dow Jones closed at 40,000.9, +1.59%, with the Nasdaq higher by +0.25%. The volatility index VIX closed the week at 12.46, down from 12.48. The Euro Stoxx 600 rose +1.45%.

The 10-year UST closed at 4.18%, down from 4.28% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -116bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 166bps and High Yield spreads tightened +5bps at 339bps. German 10-year Bunds yield closed at +2.50% down from+2.56% a week before. In Europe, Corporate Investment Grade spreads remained at 122bps and High Yield widened +7bps at 348bps.

The US Dollar Index (DXY) depreciated -0.75% last week and closed at 104.09. The Euro closed at 1.0907 (+0.62%); the Yen appreciated +1.82%, closing at 157.83 and the Swiss Franc appreciated +0.15%, closing at 0.8944. Gold closed at $2411.43, appreciating +0.81%. Oil was lower, Brent closed at $85.03 (-1.74%) and WTI at $82.21 (-1.14%).

Macroeconomy

US inflation

June headline CPI fell by -0.1% m-o-m (vs. +0.1% expected), the biggest outright decline in prices since May 2020 during the Covid-19 pandemic. Core CPI came in at just +0.1% m-o-m (vs. +0.2% expected), which is the weakest month for core inflation since January 2021. In y-o-y data, headline came in at 3% (vs. 3.1 expected) and core was at 3.3% (vs. 3.4% expected). The declines were driven by several factors, but there was a meaningful step lower in shelter inflation, with Owners’ Equivalent Rent (OER) up just +0.28% in June, which was its weakest month since April 2021, and down from +0.43% in May. To note, the OER category alone makes up more than a quarter of the CPI basket, and around a third of core CPI, so if that shift lower is durable, then that’s very good news in terms of keeping inflation low. On a 3-month annualized basis, core CPI is up just +2.1% now, which is the lowest since March 2021. To be fair, the 6-month core CPI is still at +3.3%, which reflects the stronger prints from Q1, but that’s also on a downward trajectory, and similar prints to the last two would cement the idea that inflation is on a clear path lower. Regarding PPI (Producer Price Index), the June headline PPI climbed more than expected, by +0.2% m-o-m (vs +0.1% expected) and +2.6% y-on-y (vs 2.3% expected), the categories used to calculate PCE were on the weaker side. This narrative found further support from the University of Michigan’s preliminary inflation expectations results for July. 1yr expectations were in line with expectations at 2.9% (down from 3.0% last month) and 5-10yr inflation expectations dipped to 2.9% (vs 3.0% expected). The survey also showed consumers becoming slightly more pessimistic on the economic outlook, with consumer sentiment disappointingly dropping from 68.2 to 66.0 (vs 68.5 expected), its lowest level in 8 months.

Powell in Congress

Fed Chair Powell was at his semiannual congressional testimony, appearing at the House Financial Services Committee. Powell didn’t sound more dovish in his congressional testimony, particularly given the uptick in the unemployment rate the week before. Overall, Powell’s tone was a balanced one, and he reiterated the Fed’s message that they needed “greater confidence” that inflation was moving back towards target. Nevertheless, he also explicitly said in his statement that “elevated inflation is not the only risk we face”, pointing out that keeping policy too restrictive “could unduly weaken economic activity and employment” and that “labor-market conditions have now cooled considerably”. So there was an acknowledgement of the risk of staying on hold too long.

China

The People’s Bank of China (PBOC) started the week with the announcement of temporary bond repurchase agreements or reverse repos to make open market operations more efficient, aiming to maintain sufficient liquidity in the banking system. Also, Chinese GDP grew +4.7% y-o-y in the second quarter (the worst in five quarters), missing the +5.1% forecast and down from +5.3% growth in Q1, hampered mainly by weak consumer spending and demand. On a q-o-q basis, GDP in the April-June period rose +0.7% from the previous quarter, vs. a revised growth of +1.5% in the January-March period. Other data showed that China’s retail sales slowed to +2.0% y-o-y in June (v/s +3.4% expected and the worst since December 2022) after advancing +3.7% in May, thus highlighting that the world’s second largest economy is struggling to boost consumption. Adding to the negative sentiment, China’s home prices fell again in June, declining -0.67% on the month with existing home prices declining -0.85%. Industrial output rose +5.3% y-o-y (v/s +5.0% expected) in June from a year earlier, slowing from +5.6% in May, but above expectations at least. Lastly, this week begins the third plenum of 20th party congress with the expected theme being the deepening of reforms.

Highlights

Q2 earnings

The Q2 reporting season has begun in the United States, with 21 S&P 500 companies having reported their results thus far. Notably, large banks kick off the earnings season with mixed results. JPMorgan reported earnings upside thanks to solid noninterest income and expense controls (while the prior full-year guidance was left unchanged). Citigroup reported earnings upside thanks to healthy net interest income, expense controls, and some one-time tailwinds. On the negative side, both JPMorgan and Citigroup showed a cooling in consumer spending volumes. Wells Fargo reported underwhelming results, with a miss on net interest income and a higher expense outlook while loan growth was tepid. Consensus anticipates strong growth for both S&P 500 earnings and sales, approximately 10% in Q2, with substantial growth also expected in Q3 and Q4. Half of the earnings growth in Q2 is anticipated to be driven by the "Magnificent 7," a decrease from Q1 where these seven companies contributed all of the Index’s earnings growth. The percentage growth contribution is expected to gradually decline to 40% in Q3 and 24% in Q4. The primary sector group contributors to the S&P 500 Q2 earnings growth are Telecom. and Defensives, while Cyclicals are expected to detract from Q2 earnings. At the sector level, Technology and Healthcare are the primary drivers of Q2 growth, while Travel & Leisure, Real Estate, and Basic Resources are anticipated to be the main detractors.

On rates

Off the back of the weaker inflation data, investors dialed up their expectations of Fed rate cuts, with the total number of cuts expected by year-end up +12.6bps to 63bps on the week. Markets moved to fully price in a 25bps cut by the September meeting, up from 72% on Monday, spurring a rally in US Treasuries. The 2yr yield ended the week down -15.4bps  to 4.45%, its lowest level since early February. 10yr yields followed suit, falling -9.5bps to their lowest level (4.18%) since March. In Europe it was a similar story, as 10yr bund yields finished the week -5.9bps lower.

Japanese Yen

Last week, the Japanese yen surged nearly 3% on Thursday in its biggest daily rise since late 2022, a move that local media attributed to a round of official buying to prop up a currency that has languished at 38-year lows. The dollar dropped to as low as 157.40, straight after data showed US consumer inflation cooled more than expected in June. Yet the scale and speed of the move put traders on alert to the possibility of Japanese intervention. Authorities stepped in as recently as early May to bolster the yen. Domestic news service Jiji cited top currency diplomat Masato Kanda as saying he could not comment on whether there was an intervention, but that recent moves in the yen were "not in line with fundamentals".

What to watch

• Monday: China third Plenum (15-18 July), GDP (Q2); Eurozone IP (May)
• Tuesday: US retail sales (June)
• Wednesday: UK Parliament and King’s Speech, CPI inflation (June); Eurozone final HICP (June); US IP (June)
• Thursday: UK labor market report (May); Eurozone ECB meeting (July)
• Friday: Japan CPI inflation (June); UK retail Sales (June)