2024 Weekly Update

Market update

The S&P 500 closed the week at 5,554.25, +3.93% higher. The Dow Jones closed at 40,659.76, +2.94%, with the Nasdaq higher by +5.29%. The volatility index VIX closed the week at 14.8, down from 20.37. The Euro Stoxx 600 rose +2.46%.

The 10-year UST closed at 3.88%, down from 3.94% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -133bps. US Corporate Bond spreads: Investment Grade spreads narrowed -9bps at 174bps and High Yield spreads narrowed -15bps at 360bps. German 10-year Bunds yield closed at +2.25% up from +2.22% a week before. In Europe, Corporate Investment Grade spreads narrowed -2bps at 131bps and High Yield narrowed -15bps at 368bps.

The US Dollar Index (DXY) depreciated -0.65% last week and closed at 102.46. The Euro closed at 1.1027 (+1.01%); the Yen depreciated -0.70%, closing at 147.63 and the Swiss Franc depreciated -0.12%, closing at 0.8661. Gold closed at $2,508.01, appreciating +3.15%. Oil was mixed, Brent closed at $79.68 (+0.03%) and WTI at $76.65 (-0.25%).

Macroeconomy

US inflation

Overall, inflation data from last week was just about good enough to cement the disinflation narrative. Headline CPI did accelerate in July but came in line with expectations at +0.2% m-o-m (0.155% unrounded). In y-o-y terms, the headline rate undershot expectations, rising +2.9% y-o-y (vs +3.0% expected), the slowest print since March 2021. Core rose +0.2% m-o-m (0.165% unrounded), and +3.2% y-o-y, both in line with consensus. On the surface, this is largely encouraging, but the breakdown raised a few eyebrows. Owners’ equivalent rent of primary residence bounced back +0.4%, whilst the primary rents increase was the highest since May 2023. In addition, trimmed mean and median CPI were up 0.20% and 0.33% respectively which reflected the fact that the overall number had some downside outliers in it. Regarding PPI (Producers prices), it undershot expectations on both the headline (+0.1% m-o-m vs +0.2% expected) and on the core measure (0.0% vs +0.2% expected). Indeed, for core PPI this was the weakest reading since December, and with June revised down from +0.4% to +0.3%. In annual terms, headline PPI rose +2.2% (vs +2.3% expected) and core by +2.4% (vs +2.6% expected). The bulk of July’s miss came down to trade services, which measures changes in ‘margins’ received by wholesale and retail. This dragged overall services PPI down -0.2%, the first monthly decline since March 2023. Lastly, the New York Fed’s consumer survey for July showed that median 3-year inflation expectations fell to their lowest since the start of survey in 2013 at +2.33%, while 1-year expectations ticked down marginally from 3.02% to 2.97%, their lowest since 2020.

US consumer

July headline retail sales strongly exceeded economists’ expectations, accelerating +1.0% m-o-m (vs +0.4% expected), up from -0.2% in June (revised down from 0.0%). This is the fastest increase in retail sales since January 2023. And retail control rose by a strong +0.3% (vs +0.1% expected), with a third consecutive monthly increase bringing the 3m annualized growth of retail control to +6.8%, its highest since June 2023. In the same lines, Walmart raised its sales and profit outlook for the full year in its Q2 earnings report, emphasizing that although consumers were looking for deals and were focused on buying essentials, the company did not see any weakening of their financial health as spending remained robust.

Fed speak

We heard from several Fed hawks about the chance of a September rate cut. Atlanta Fed president Bostic commented he was “open” to a September rate cut, and that the “Fed can’t afford to be late to ease policy”. Also, the Fed’s Musalem emphasized “inflation seems to have returned to a path of 2%”, and the “time may be nearing when (it is) appropriate to adjust rates”.

UK data

In Q2, UK GDP grew strongly by 0.6% q-o-q, in line with expectations and close to the BoE's forecast (0.7% q-o-q), after 0.7% q-o-q in Q1. Looking at the details on the demand side, underlying momentum appears to be weaker than the headline figure suggests. The positive impact on growth is therefore likely to be reversed in the next quarter. Moreover, growth was driven by government spending, while private consumption growth declined to almost zero. The unemployment rate fell to 4.2% from 4.4% in Q2, against consensus expectations for a small rise to 4.5%, suggesting some residual resilience in the labor market. However, higher frequency data point to a softening at the start of Q3, with jobless claims rising sharply by 135,000 in July, the largest increase since COVID-19. The social unrest in the country since 29 July may have had an impact. Meanwhile, growth in average weekly earnings fell slightly below consensus expectations from 5.7% to 4.5% y-o-y in Q2. Earnings excluding bonuses also fell from 5.8% to 5.4%. Wage growth fell in both the private and public sectors and across all industries except construction. July UK inflation surprised to the downside. Headline inflation rose from 2.0% to 2.2%, against a consensus of 2.3%. Core inflation fell more than expected, from 3.5% to 3.3%, against expectations of 3.4%. Most of the unexpected decline came from services inflation, which remains high but fell more than expected from 5.7% to 5.2% against a consensus of 5.5%. Combined with labor market data, which pointed to rising jobless claims in July and declining wage growth in Q2, inflation developments support the case for two more rate cuts by the BoE this year.

Highlights

Q2 earnings

With almost 90% of companies having reported in the US and Europe, the Q2 earnings season is reaching its final stages. EPS growth is coming in at +8% y-o-y in the US and +1% y-o-y in Europe, beating expectations by 4% and 3% respectively. For the first time in 5 quarters, EPS growth for the S&P500 ex-Magnificent 7 is positive, marking an encouraging broadening in earnings delivery in the US. At a sector level, Healthcare, Financials, Utilities and Discretionary are reporting double-digit earnings growth in the US. Staples are flat while Materials are down on a y-o-y basis. In Europe, Communication services, Healthcare, Staples, and Financials are reporting positive earnings growth while all other sectors are seeing negative growth. Top line numbers in both regions have underwhelmed, with the proportion of companies beating sales expectations down significantly. Only 48% and 51% of companies are beating sales estimates in the US and Europe respectively.

On rates

US 10yr yields retreated -5.7bps, to 3.88%. 2yr yields were volatile despite ending the week flat (-0.3bps) at 4.05%. Yields initially slid following inflation data that were good enough to support the disinflation narrative but rose sharply on Friday on the back of strong labor and consumer data. 2yr yields rose +13.5bps on the day, its largest daily increase since the first week of June. Fed expectations were also volatile as investors dialed back expectations of a 50bps cut in September. The number of cuts expected in the next meeting fell from 40bps at one point during the week to now 32bps. At the same time, the number of cuts expected by year-end fell to 95bps. European rates sold off. 10yr German bunds rose 2.2bps to 2.25%.

What to watch

• Monday: US Leading Index (July)

• Tuesday: Euro area CPI (July)

• Wednesday: Japan Trade Balance (July); US FOMC Meeting Minutes (July 31st)

• Thursday: Japan BoJ PMI (Aug.); Euro area PMIs (Aug.); UK S&P Global PMIs (Aug.); US S&P Global PMIs (Aug.); Jackson Hole gathering starts (speeches on 24th)

• Friday: US New Home Sales (July)