2024 Weekly Update

Market update

The S&P 500 closed the week at 5,344.16, -0.04% lower. The Dow Jones closed at 39,497.54, -0.60%, with the Nasdaq lower by -0.18%. The volatility index VIX closed the week at 18.65, down from 21.43. The Euro Stoxx 600 rose +0.27%.

The 10-year UST closed at 3.94%, up from 3.79% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -128bps. US Corporate Bond spreads: Investment Grade spreads widened +8bps at 183bps and High Yield spreads widened +14bps at 375bps. German 10-year Bunds yield closed at +2.22% up from +2.17% a week before. In Europe, Corporate Investment Grade spreads widened +8bps at 133bps and High Yield widened +15bps at 383bps.

The US Dollar Index (DXY) depreciated -0.07% last week and closed at 103.14. The Euro closed at 1.0917 (+0.05%); the Yen depreciated -0.05%, closing at 146.61 and the Swiss Franc depreciated -0.71%, closing at 0.8651. Gold closed at $2,431.32, depreciating -0.49%. Oil was higher, Brent closed at $79.66 (+3.71%) and WTI at $76.84 (+4.52%).

Macroeconomy

US jobs

The jobless claims was the first main piece of US labor market data after previous week’s nonfarm payrolls. To put in context, July payrolls were soft at +114k m-o-m (vs. +175k expected), and with a -27k downward revision to June’s print. Private payrolls (97k vs. 140k expected) were also disappointing and both sets of data came well below their three-month averages (170k and 146k, respectively). In contrast to the weak payrolls, initial claims fell below expectations, coming in at +233k (vs +240k expected), falling -17k from the previous release, their largest decline since September. This more than reversed last week’s unexpected rise that saw initial claims reach their highest level since last August. Continuing claims were in line with consensus views, at 1875k. The better outturn pointed to enough strength in the US labor market to suggest that it is not falling apart. It provided some evidence to the view that part of the weak payrolls may have been weather-related effects.

US data

For the week ahead the key focus for markets is likely to be on US inflation data, with the July CPI print on Wednesday preceded by the PPI data on Tuesday. Analysts expect both headline and core CPI to rise +0.20% on the month, which would leave annual headline CPI steady at 3.0%, with core ticking down a tenth to 3.2%. On a monthly basis, this would be an acceleration from the +0.1% core CPI print in June, but with both the three- and six-month annualized rates falling by 40bps to 1.7% and 2.9%, respectively. In terms of the CPI details, there will be focus on whether the June slowing in rental inflation is sustained. For the PPI on Tuesday, analysts see headline PPI gains staying at +0.2% m-o-m, though PPI components that feed into the Fed’s preferred core PCE measure may leave it running ahead of core CPI for the second month in a row. Other notable US releases this week will include July retail sales and industrial production on Thursday. These will present some of the first pieces of hard activity data for Q3. We will also have the University of Michigan consumer survey on Friday and other evidence on the health of the US consumer with earnings reports from Home Depot (Tuesday) and Walmart (Thursday) as the earnings season winds down.

Fed speak

The upcoming inflation data will be important for whether the Fed gains confidence to signal more clearly a cut at the September meeting. Over the weekend we heard from Fed Governor Bowman, who commented that “she “will remain cautious in my approach to considering adjustments to the current stance of policy” as "inflation is still uncomfortably above the committee’s 2% goal". So, one of the most hawkish FOMC voices sounding not yet convinced on the immediacy of rate cuts. Several regional Fed presidents are due to speak this week, including Bostic on Tuesday, Musalem and Harker on Thursday and Goolsbee on Friday. Investors will seek for any changes in tone in response to the inflation data. However, we may have to wait until next week’s Jackson Hole symposium for an in depth take on how the Fed is thinking about the expected easing cycle.

PMI

The global PMI composite eased to 52.5 in July, compared to 52.9 in June. However, the PMI for world services is still holding strong (53.3 in July vs 53.1 in June). This resilient sentiment in services is evident in both advanced (53.5) and emerging economies (53.2). On the other hand, sentiment in the manufacturing sector deteriorated across the board. The world PMI for manufacturing has fallen back into contraction territory (49.7 in July vs 50.8 in June), after five months above the 50 threshold. Both, advanced economies (AE) (48.8 vs 49.7 in June) and emerging economies (50.7 vs 52.1) experienced a decline. While still in expansion territory, the deterioration for emerging economies (EMG) is particularly concerning, as they have been the driving force of growth in the post-covid period. All components of PMI manufacturing showed signs of deterioration. It is worth noting that this deterioration does not include the early August financial market turmoil. Therefore, it is likely that August will experience further deterioration as higher uncertainty is expected to cause companies to postpone new orders, delay purchases of inputs and slow down production.

Highlights

Q2 earnings

We are entering the final stages of the Q2 earnings season with more than 90% of S&P reported. 78% of companies that have reported beat EPS estimates and EPS growth stands at +9% y-o-y, surprising positively by 4%. Top-line numbers have been less upbeat and the proportion of companies beating sales estimates is low, currently sitting at 47%. At a sector level, Utilities, Discretionary, Healthcare, and Financials are seeing double-digit earnings growth while Materials and Staples are flat or down on a y-o-y basis. This week, Home Depot and Walmart will publish results and giving more evidence on the health of the US consumer. In Europe, 60% of Stoxx600 companies that have reported beat EPS estimates. Q2 EPS growth is +1% y-o-y, surprising positively by 3%. Most sectors have shown positive net income surprises, with Consumer Products, Banks, and Industrials as the top performers. Real Estate, Travel & Leisure, and Banks have outperformed in sales. Despite some downward revisions, Q4 growth in the US remains robust, though weaker growth is expected in Europe. The 12-month forward earnings outlook is improving for the S&P 500 but deteriorating for the Stoxx Europe 600.

On rates

A weak 10-year auction and a dialing back of aggressive market pricing of monetary easing pushed US Treasury yields higher. 2yr Treasury yields posted their largest weekly increase since March rising +17.3bps to 4.05% and 10yr yields ended the week +15.0bps higher at 3.94%. That meant the US Treasury yield curve steepened meaningfully, with the 2s10s treasury slope ending the week -6.5bps lower at -11.7bps, having briefly turned positive on Monday. Market participants expect 101bps of cuts by year-end, forecasting at least one 50bps cut across the remaining three FOMC meetings. Over in Europe, bond market moves were more modest. 10yr bund yields rose +5.1bps to 2.22%, while OATs (+0.4bps) and BTPs (+1.1bps) were little changed over the week.

What to watch

• Monday: No major event.
• Tuesday: US: PPI (July), NFIB Business optimism index (July); Germany: ZEW survey (August)
• Wednesday: US: CPI (July); Euro Area: GDP (Q2), Industrial production (June); UK: CPI, PPI, Retail sales (July); Japan: GDP (Q2)
• Thursday: US: Retail sales (July), Industrial production (July), Initial jobless claims; UK: GDP (Q2)
• Friday: US: Michigan consumer sentiment index (August), Building permits and housing starts (July)