Political challenges
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Market update
The S&P 500 closed the week at 6,460.26, -0.10% lower. The Dow Jones closed at 45,544.88, -0.19%, with the Nasdaq lower by -0.19%. The volatility index VIX closed the week at 15.36, up from 14.22. The Euro Stoxx 600 fell -1.99%.
The 10-year UST closed at 4.23%, down from 4.25% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 8bps. US Corporate Bond spreads: Investment Grade spreads widened +1bp at 79bps and High Yield spreads narrowed -10bps at 336bps. German 10-year Bunds yield remained unchanged from the previous week, closing at 2.72%. In Europe, Corporate Investment Grade spreads widened +3bps at 95bps and High Yield widened +11bps at 302bps.
The US Dollar Index (DXY) appreciated +0.06% last week and closed at 97.77. The Euro closed at 1.1686 (-0.27%); the Yen depreciated -0.07%, closing at 147.05 and the Swiss Franc appreciated +0.12%, closing at 0.8005. Gold closed at $3,447.95, appreciating +2.26%. Oil was higher, Brent closed at $68.12 (+0.58%) and WTI at $64.01 (+0.55%).
Macroeconomy
Tariffs
On Friday, a US federal appeals court ruled that tariffs introduced under International Economist Emergency Powers Act (IEEPA) were illegal, upholding an earlier ruling by the Court of International Trade. However, in its 7-4 ruling the court left the tariffs in place until October 14 giving the administration time to appeal the case to the Supreme Court. While most judges in the appeals court ruling were nominated by Democrat Presidents, there is a 6-3 Republican-appointed majority on the Supreme Court. Were IEEPA tariffs to be stuck down, this would invalidate most levies introduced this year, including the “reciprocal” country rates and the “fentanyl” tariffs on China, Mexico and Canada, though the administration could look to implement more levies via other statutes.
Fedspeak
Governor Waller, who was one of the two Governors who dissented in favor of a rate cut at the last meeting in July, struck a dovish tone. His speech was titled “Let’s Get On with It”, in reference to cutting rates. He even floated the idea of a cut bigger than 25bps, saying that even though “I don’t believe that a cut of larger than 25 basis points is needed in September”, that could change if the next jobs report “points to a substantially weakening economy and inflation remains well contained”. Also, New York Fed President Williams said that “I definitely think that every meeting is, from my perspective, live”. And he also said that rates were still “modestly restrictive”. Otherwise, we got a bit more on the timeline for the appointment of the new Fed Chair, as Treasury Secretary Bessent said in a Fox Business interview that there were 11 candidates, of which three or four would be presented to President Trump, and then the decision would “surely” be known in the fall.
US data
The US economy recorded an annualized growth rate of 3.3% in Q2, an increase from the initial estimate of +3.1%. Business investment (+5.7%) and private consumption (+1.6%) contributed. While this comes after a -0.5% decline in Q1, it still leaves average growth during the first half of the year not too far below trend, which economists see at just above +2%. July's PCE (Personal Consumption Expenditure), Fed’s preferred measure of inflation, was in line with economists' forecasts. However, the core PCE's annual increase of 2.9% still exceeds the Fed's 2% inflation target. On more mixed economic data, we saw robust personal spending, alongside weaker consumer confidence and lower inflation expectations. July’s personal income rose by +0.4% m-o-m, while spending increased by +0.5%, both meeting expectations. However, the University of Michigan's August survey indicated reduced sentiment reading at 58.2 (compared to the expected 58.6) and lower inflation expectations, forecasting +4.8% for one year (versus +5.0% expected) and +3.5% for 5-10 years (versus +3.9% expected). Regarding housing, new home sales totaled 652k in July, exceeding expectations (630k) as June data was revised higher from 627k to 656k, while median new sales prices edged lower.
France politics
France is entering a phase of heightened political uncertainty as Prime Minister Bayrou’s austerity budget, tied to a 8 September confidence vote, faces near-certain defeat amid opposition from across the political spectrum, raising the likelihood of government collapse and further instability. This political turmoil has contributed to elevated French government bond yields and a widening OAT-Bund spread, with the risk of a sovereign rating downgrade increasing, particularly ahead of Fitch’s 12 September review. In equities, the CAC’s persistent underperformance versus European peers is primarily driven by falling earnings in key sectors rather than political risk, but the recent widening in French bond spreads and political uncertainty may limit any near-term re-rating of French equities. In currencies, while the euro has not been the primary casualty of France’s political crisis, historical correlations with the Bund-OAT spread suggest that ongoing French fiscal challenges could weigh on the currency in the short term, though medium-term prospects for EURUSD remain supported by a likely narrowing of US-EU interest rate differentials.
Europe CPI
Consumer price indexes in Spain, France and Italy came in 0.1% below expectations in August, fueling hopes that the European Central Bank will not see the necessity to change the key interest rates in September. In Germany, prices increased by +2.2% in July from +2% in June y-o-y. Food prices were up, but energy costs drove the figure slightly down. Prices increased by +0.1%, compared to the previous month. In France, EU-harmonized inflation was modest, +0.8% y-o-y in August. This was driven down by a slow service inflation. Food prices remained stable, while the downturn in energy costs moderated. Prices increased by +0.5% m-o-m. In Spain, the EU-harmonized consumer price index increased by 2.7% on an annual basis, and the monthly data was unchanged. In Italy, prices were up +1.7% y-o-y, slightly slower than in July, as inflation eased on energy products but accelerated on food. Compared to the previous month, prices inched higher by +0.1%.
SCOS
China is hosting the annual Shanghai Cooperation Organization summit. Yesterday China’s Xi Jinping met with India’s Narendra Modi, with the two sides pledging to “remain partners rather than rivals”. The summit has received extra attention amid Trump’s tariff pressure on Asian countries, and Modi will also meet with Russia’s Vladimir Putin today, shortly after the US raised tariffs on India to 50% last week in response to its purchases of Russian oil.
China PMI
RatingDog (previously Caixin) China Manufacturing PMI rose to a 5-month high of 50.5 in August (49.8 expected) from 49.5 in July. This comes in contrast to the official PMI figures on Sunday, which saw the manufacturing PMI (49.4 vs 49.5 exp, 49.3 prev.) stay below 50. That said, China’s official non-manufacturing PMI rose from 50.1 to 50.3 (50.2 expected).
Highlights
On rates
Last week, sovereign bonds saw divergent dynamics in their yields. The 2yr Treasury yield fell -7.9bps to 3.62%, its lowest weekly close since September 2024. At the same time, concerns about Fed independence led to a sizable steepening in the yield curve, with the 10yr yield down a modest -2.5bps to 4.23% but the 30yr yield up +5.2bps to 4.93%, leaving the 2s30s slope at its steepest since November 2021. Fed funds futures ended the week pricing in 109bps of easing by next June (+2.6bps on the week). With Fed Chair Powell positioning job market dynamics above inflation among the Fed’s monitoring priorities during his Jackson Hole speech, the US payroll print on Friday will be a major piece of data. The market is now pricing in an 87% chance of a rate cut at the next September meeting. Beyond that, markets will closely monitor the President’s attempt to remove Fed Governor Cook - a Biden appointee that the White House is eager to remove - while it also appears that Stephen Miran’s confirmation for the Fed vacancy is anticipated before the next September meeting. In Europe, following news on French political instability, the 10yr OAT yields rose +9.1bps, as the Franco-German 10yr spread ended the week at 79bps after hitting a 7-month high of 82bps on Wednesday. Other government bonds saw more muted moves, with 10yr bund yields +0.3bps higher (+3.0bps Friday), while BTP yields rose +6.1bps (+4.9bps Friday) suffering some contagion from the France story.
Earnings
Reaching the tail end of this earnings season, 98% of S&P 500 companies have reported actual results. Companies have reported overall positive EPS results, and 81% of S&P 500 companies reported a positive revenue surprise, above the 5-year average of 78%. The blended y-o-y earnings growth rate for S&P 500 companies is 11.5%, on track to mark the third consecutive quarter of double-digit earnings growth for the index. Looking at the technology sector, four of the “Magnificent 7” companies are among the top six contributors to earnings growth for the S&P 500 for the second quarter. Earnings reported by the “Magnificent 7” companies exceeded estimates by 10.5%, compared to 7.7% for all S&P 500 companies. However, these companies reported actual earnings growth of 26.6%, slightly below the average earnings growth rate of 31.0% over the previous quarters. Last week, NVIDIA released positive results, which exceeded its guidance but were largely in line with market expectations, with sequential growth seen across all market platforms. However, revenue growth for the data center division slowed, in part due to a pause in sales of AI chips to China. Looking ahead, a few big groups are reporting this week, including Partners Group on Tuesday, Salesforce on Wednesday, and Adobe on Thursday, among others.
What to watch
- Monday: Eurozone & UK Manufacturing PMI; Korea Exports; Asia Manufacturing PMI
- Tuesday: US ISM Manufacturing; Eurozone CPI
- Wednesday: US JOLTS; Durable Goods Orders; Fed Beige Book; Eurozone Services and Composite PMI; Korea & Australia Q2 GDP
- Thursday: US ADP Employment, Initial Jobless Claims, ISM Services; Switzerland CPI; Eurozone Retail Sales
- Friday: US Nonfarm Payrolls and Unemployment Rate; UK Retail Sales; Japan Labor Earnings