Global equities rallied again last week, with the MSCI World Index closing up 1%.1 Central bank announcements were the key focus for investors, as the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ) all released their latest updates. Dovish takeaways from the Fed and the ECB triggered the rally. We are also in the midst of second-quarter earnings season, which usually brings some extra volatility. Overall, the majority of companies which have reported have beaten earnings-per-share (EPS) estimates. In terms of fund flows, inflows resumed into US equity funds, which received US$9.9 billion last week, but it was another week of outflows for Europe-focused equity funds, which shed another US$1.3 billion, marking the 20th consecutive week of outflows.2
Central banks in focus
On Wednesday, the Fed raised interest rates 25 basis points (bps) as expected, taking the upper band of its key rate to 5.5%. In its statement, the Federal Open Market Committee (FOMC) slightly improved the commentary around economic growth, upgrading its description of economic growth to “moderate” from “modest”. In addition, Fed Chair Jerome Powell said the central bank’s economists are no longer forecasting a recession in 2023, given the resilience of the economy recently. However, he did note that they are still anticipating a noticeable slowdown in growth, starting later this year. Notably, it was mentioned that inflation does still remain “elevated” and the Committee doesn’t see inflation back at 2% until about 2025. On a more positive note, the statement said the banking sector remains “sound and resilient”.
The main takeaway seems to be that Powell is keeping his options open for the next meeting, which isn’t until 20 September (eight weeks away). Before then, we are due two Consumer Price Index (CPI) inflation reports and two monthly employment reports, so it is understandable that Powell was careful not to get tied to any actions for the next meeting. He said: “All of that information is going to inform our decision as we go into that meeting….It is certainly possible that we would raise [rates] again at the September meeting, if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting”.
Importantly, a soft landing looks increasingly likely, and it seems like the market agrees.
Thursday’s ECB interest-rate decision was also a key market catalyst. The markets had fully priced in a hike of 25 bps ahead of the announcement; however, the focus for investors was more on the language of ECB President Christine Lagarde and any hints on expectations at September’s meeting. Prior to the meeting, the market had priced a 50/50 chance of a hike in September, too. The latest European Purchasing Managers Indices (PMIs) have disappointed across the board, signalling a worsening economic picture, so the market was on the lookout for any specks of dovishness. The July Eurozone Composite PMI came in at 48.9, vs. 49.9 previously. Within that, manufacturing was the clear disappointment, comfortably in contraction territory at 42.7 vs. 43.4 previous. Services were also lower at 51.1, vs. 52.0 previous.
As noted, the ECB raised rates 25 bps, increasing the deposit rate to 3.75%. There was very little guidance given on whether the central bank would hike again in September, instead highlighting that any decisions would be based on the data. Note, there are two more CPI readings before the next ECB meeting in September. So, like the Fed, the ECB will also have the benefit of a little more time in the sense of reviewing the full impact of the current tightening cycle. This is the first time this year that the ECB has not pre-confirmed a hike at the following meeting.
In terms of commentary, notably, the Council dropped the language around policy “having still more ground to cover”, which was taken as dovish. At the press conference, Lagarde struck a more balanced tone than previously. She said that the ECB has an open mind on decisions in September and beyond, playing down expectations for a hike. However, she did repeatedly insist that the ECB’s only goal was to achieve 2% inflation, “come what may”.
On Friday, the focus shifted to the BoJ meeting. The focus for markets was on any tweaks to the central bank’s yield curve control (YCC) policy. Inflation remains above the BoJ’s 2% target, as the June core inflation rate accelerated to 3.3% from 3.2%.
In the announcement, the central bank introduced some flexibility to YCC. Specifically, it still targets the 10-year Japanese government bond yield at 0.0% but will allow variance of +/-0.5%, and that range will now be a reference point, not a rigid limit. This was taken as hawkish relative to the bank’s ultra-loose policies, and we saw the Nikkei Stock Index fall on the back of yen strengthening. Some observers noted that starting yield curve controls was akin to a rate hike, despite the fact that the BoJ also left its policy rate target unchanged at -0.1%.
In conclusion, it is clear to us that the Fed and the ECB are nearing the end of their hiking cycles. However, the market still appears to be split on a what September may bring, as data could push the decision either way. All eyes will be on the Bank of England (BoE) this week.
Week in review
The STOXX Europe 600 Index saw a third consecutive week of gains, up 1.1% last week, whilst the STOXX Europe 50 gained 1.7%. The rising belief that the ECB is nearing peak rates helped lift equities towards the end of the week. Also, China Politburo stimulus headlines helped broader sentiment. Aside from that, the market was swamped with corporate earnings, as a third of the STOXX 600 Index have reported. Of note, Europe’s largest company (by market cap), LVMH, reported weaker numbers, trading down 3.1% on the week.
Sector performance saw a tighter spread between the best-performers (autos and technology) and worst (utilities and oil and gas). Cyclicals slightly outperformed defensives. US interest rates moved higher, with the 10-year Treasury back at 4%.
Market breadth improving: It is interesting that market breadth has improved on the recent rally, after so much was made of the narrow market breadth in the first half of the year.
European macro data: There is a reoccurring theme of weak macro data out of Germany, as gross domestic product (GDP) stagnated in the second quarter. For the doves, French inflation dropped to the lowest level for 16 months, as falling energy prices brought consumer price growth down to 5% in June from 5.3% the previous month.
In addition, ECB business loan data, a key data point for the ECB, was weak.
It was another positive week for US equity markets, with the dovish FOMC meeting leading the market higher. The S&P 500 Index closed the week up 1.0%, whilst the Russell 2000 Index was up 1.1% and the Nasdaq Index was up 2.1%. Of note, on Wednesday, the Dow Jones Industrial Average notched its 13th consecutive positive day, marking its longest winning streak since 1987.3 The index did sell off on Thursday but recovered lost ground again on Friday to close the week up 0.7%.
Away from central bank rhetoric, second-quarter earnings season continues to be a key focus for investors. According to a research note from JP Morgan, 80% of companies are beating EPS estimates in the United States, with a larger-than-usual magnitude of surprise.4 However, it seems that companies that are beating earnings expectations are not being rewarded as much as they typically have, while those that are missing are being penalized more harshly.
In terms of macroeconomic data, US flash PMIs on Monday were mixed. US flash manufacturing PMI beat expectations, but was still in contraction territory, whilst the flash services PMI missed, but was still in expansion. Thursday’s macro releases were strong, with second-quarter GDP beating estimates, whilst June Durable Goods Orders beat significantly, and weekly jobless claims came in below expectations. On Friday, June core Personal Consumption Expenditures (PCE) was in line with expectations, decelerating from May and now up 4.1% year-over-year. Personal spending increased faster than estimated.
It was a better week overall in Asia, with the MSCI Asia Index closing up 2.45% last week on the back mainly of the Chinese Politburo meeting and the BoJ release on Friday. News of China stimulus earlier in the week was a further tailwind for Chinese equities. The Politburo stated the economic recovery was “tortuous” and it was “necessary to actively expand domestic demand” and “expand consumption by increasing residents’ income”. There was not too much detail, but clearly supportive for sentiment. The BoJ is discussed in more detail above, but the long-talked-about softening attitude towards a hard YCC policy seems to be coming true (at last)—albeit change is incremental, rather than significant.
Last week was solid for Japanese equities, which closed higher as the BoJ surprised investors (as discussed above) by tweaking its monetary policy, announcing that it would increase flexibility around its YCC target. It also revised its forecast higher for consumer price inflation in 2023. Yields on government bonds rose and the Japanese yen strengthened. Overall, banks, insurance and rubber products were the best-performing sectors, while utilities, foods and steel were the worst.
Last week was strong for mainland Chinese equities. The benchmark index closed up 3.42%, mainly due to the positive pro-growth tone (albeit no hard detail) out of the Politburo meeting and hope for a range of supportive economic measures, setting a supportive tone for the second half of the year. The government also vowed to put in place several measures to support the ailing real estate sector—more relaxation on purchase and mortgage loans may come for tier-1 cities in addition to the recently announced urban village renewal projects. Cyclicals including property, building materials, and construction stocks all outperformed.
The meeting also put consumption ahead of industrial policies and reiterated the goal to expand consumption in automobiles, electronics, household items, tourism etc. Local government debt risks were also addressed, and the meeting said China will implement a series of new policies to resolve the risks. For capital markets, the meeting pledged to reinvigorate the market and lift investor confidence with more supportive measures like T+0 trading, stamp duty tax cuts, etc. The market gained ground despite some softer economic news, including weaker GDP and other growth numbers. Elsewhere, Pan Gongsheng was appointed as the governor of the People’s Bank of China PBoC), although this was expected.
Stocks in Hong Kong performed well, closing up 4.4% last week, again on the back of the Politburo meeting and hope for a range of supportive measures across the spectrum. Chinese developers bounced after China’s government pledged to optimize and adjust property policies to ensure the sector’s healthy development, together with press speculation that the government will continue to ease property policies in the second half of the year. Auto and auto parts stocks jumped after authorities released the latest version of standards for connected cars, also helped by sentiment from Xpeng’s new long-term strategic agreement with VW. Tech giants advanced as the PBOC called on the financials sector to provide more support for tech companies, while the largest tech firms were asked to provide case studies of successful startup investments, in further signs of easing in the sector.
Week ahead highlights
Monday 31 July
- Italy GDP; Italy HICP Inflation
- UK Mortgage Approvals; UK Consumer Credit
- Euro-area GDP; Euro-area CPI estimate
- Netherlands CPI EU Harmonized and Retail sales
- Germany Retail Sales; Germany GDP
- Switzerland Retail Sales Real
- Spain Current Account Balance
- US Chicago PMI
Tuesday 1 August
- UK Nationwide House Prices
- Germany unemployment change
- Italy unemployment rate
- Eurozone unemployment rate
- US S&P/Markit Manufacturing PMI; US Manufacturing ISM & Construction spending & JOLTS job openings
Wednesday 2 August
- Spain unemployment change
- Switzerland PMI Manufacturing
- US ADP employment; US housing inventories
Thursday 3 August
- Germany Trade Balance; Germany HCOB Services PMI
- Switzerland CPI
- France Budget Balance YTD
- Italy HCOB Services PMI; Italy Retail Sales
- France HCOB Services PMI
- UK S&P Global/CIPS Services PMI; UK Decision-Maker Panel Survey; BoE meeting
- Eurozone PPI
- US Challenger layoffs; US Nonfarm business productivity and continuing jobless claims; US Factory Orders
Friday 4 August
- Germany Factory Orders
- France Industrial and Manufacturing Production
- Spain Industrial Output
- UK New Car Registrations; UK S&P Global/CIPS UK Construction PMI
- Italy Industrial Production
- Eurozone retail sales
- US July employment report (nonfarm payrolls, unemployment rate, average hourly earnings)
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Bloomberg, BofA’s Hartnett Says Real Rates Not High Enough to Pop AI Bubble.” 28 July 2023.
3. Source: CNBC. “The Dow missed its 14th straight gain — a coin flip could have done that.” 28 July 2023.
4. Sources: JP Morgan, Bloomberg Finance.