US equities showed mixed performance in a fairly quiet week. The key data release of the week came on Friday, with the Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index easing to 2.6% year-on-year in May, in line with expectations. This boosted expectations of a rate cut from the Fed in September and helped support stocks at the start of the session, however the positive momentum fizzled out with investors also weighing political uncertainty following Biden’s weak performance in the first presidential debate.
The Nasdaq Composite fared the best for the week, up 0.2% in its fourth week of gains, as technology stocks continued to outperform, having driven most of the gains in the first half of the year. The S&P 500 ended marginally lower for the week but remained close to all-time highs and notched monthly and quarterly gains. The Dow Jones also dropped less than 0.1% for the week, weighed down by losses in Nike, with shares dropping nearly 20% on Friday after it issued a gloomy outlook. While shorter dated Treasury yields were lower on expectations of a September rate cut, longer-dated Treasuries ticked higher. The 10-year yield ended at 4.37% for the week and notched another quarterly rise.
European markets had a downbeat week amid political uncertainty. Over the weekend the first round of voting in the French parliamentary election took place, with the CAC 40 losing almost 2%, taking its quarterly loss to 8.8%, underperforming other European peers. Meanwhile the risk premium on French government bonds reached its highest level since 2012. The UK FTSE 100 was down 0.9% for the week while yields rose, with UK voters heading to the polls this week. One brighter spot was Germany, with the DAX index up 0.4% even with underwhelming economic data points. The pan-European STOXX 600 fell 0.7%, seeing a quarterly loss.
Japan’s equity indices posted solid gains amid yen weakness. The Nikkei 225 was up 2.6% while the Topix added 3.1% and it managed to hit a 34-year high. Attention remained on the Japanese currency which weakened past 160 per US dollar, raising speculation as to whether there would be any intervention into foreign exchange markets. Japanese bond yields rose of increased expectations of further policy tightening from the Bank of Japan. In China, stocks notched weekly losses with ongoing concerns about the state of the economic recovery.
Weekly macro highlights
US PCE inflation eases in May
US PCE inflation rose 2.6% year-on-year (YoY) in May according to data published by the Bureau of Economic Analysis. The data was in line with market expectations and 0.1 percentage points below the 2.7% recorded in April. In month-on-month (MoM) terms, headline PCE inflation was unchanged, having risen 0.3% in April. Goods inflation was -0.4% MoM in May, with durable and nondurable goods prices falling 0.8% and 0.2% respectively. Services inflation was 0.2% MoM in May, easing from the 0.3% registered in April. Excluding food and energy inflation, which were 0.1% and -2.1% MoM respectively, core PCE inflation was 0.1% MoM in May. This contributed to YoY core inflation of 2.6%, below the 2.8% registered in April. Supercore PCE inflation, which captures services excluding energy and housing inflation, rose 0.1% MoM in May. This was below the 0.3% increase in April, contributing to the YoY rate of supercore PCE inflation easing from 3.7% to 3.6%.
Germany’s ifo Business Climate Index declines in June
Germany’s ifo Business Climate Index fell from 89.3 in May to 88.6 in June, below market expectations for an increase to 89.7. The index, which tracks sentiment at companies in Germany, declined due to more pessimistic expectations, with assessments of the current situation remaining unchanged in June. The expectations index, which represents the difference in percentage shares of “more favourable”, “unchanged”, and “less favourable” responses from businesses regarding their expectations for the next six months, fell from 90.3 to 89.0. The decline was driven by the manufacturing sector, with the outlook for the service sector improving, particularly in the hotel sector. The situation index, which represents the difference in percentage shares of “good”, “satisfactory”, and “poor” responses regarding the assessment of the current business situation, was unchanged at 88.3. The divergence of manufacturing and service firms continued, with the index for manufacturers falling and that of services rising.
Tokyo inflation rises in June as BoJ rate increase moves into focus
Tokyo Consumer Price Index inflation, a strong leading indicator for nationwide inflation in Japan, rose 2.3% year-on-year (YoY) in June. The data was above the 2.1% YoY increase recorded in May and reflected an acceleration of services inflation, a dynamic the Bank of Japan (BoJ) views as a signal of stronger underlying domestic inflationary pressures. Although goods inflation continues to outpace services inflation, partially reflecting higher import costs due to the depreciation of the yen, a decline from 4.1% YoY to 4.0% YoY in June while services inflation accelerated from 0.7% YoY to 0.9% YoY is likely to draw the BoJ closer to its next interest rate increase. Core inflation, which excludes fresh food but includes energy prices, rose 2.1% YoY in June, above the 1.9% registered in May and the BoJ’s 2% inflation target. Minutes of the BoJ’s June meeting were released on Monday and highlighted that “upside risks to prices have become more noticeable”.
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