Shaw and Partners

Global equities rose to a new high, boosted by increased confidence the Federal Reserve will soon cut interest rates as a consequence of moderating inflation and a more balanced job market. The MSCI World All Countries index gained 1.34% in the week, pushing the gains since the beginning of the year to almost 14%. The expectations that US monetary will be eased, likely starting form September, were also supported by Chairman Powell remarks during his hearing before the Congress.

US CPI (Consumer Price Index) fell on the month and, importantly, core and services prices inflation fell more than expected in June. This corroborated Powell’s earlier comments about encouraging improvement on prices and an increased balance in the US job market which is expected to lead to a moderation in wages and underlying inflationary pressures.

The fall in US inflation was key to improved investors’ sentiment and also sparked a sharp rotation within the equity market to the benefit of small cap. The Russell 2000 index posted a 6% weekly gain, the strongest performance since last November. One caveat to the strong performance of smaller sized companies is that trading volumes were low, reflecting the summer vacation season and investors reduced activity ahead of the beginning of the second quarter earnings season.

On the latter front, the first signs were mixed, with earnings releases from US banks missing estimates and revising down the outlook. However, analysts expect earning for the S&P500 companies to accelerate to 9.3% YoY (year-on-year) in the second quarter from 5.9% in the first three months of the year.

A further element of support for global equities came from the fall in government bond yields. The 10-year Treasury bond yield fell below 4.2%, the lowest level since March, benefiting small caps and interest-rate sensitive sectors including real estate and utilities.

Weekly macro highlights

Chinese inflation remains weak in June

Chinese CPI inflation fell 0.2% month-on-month (MoM) in June according to data published by the National Bureau of Statistics (NBS). The data was below the -0.1% MoM inflation recorded in May, which markets were expecting to be repeated in June. The steeper rate of monthly deflation contributed to a decline in YoY inflation from 0.3% to 0.2%. Food prices continued to act as a drag on headline inflation, falling 2.1% YoY in June as 7.3% and 13.4% YoY declines in vegetable and beef prices respectively offset an 18.1% YoY increase in pork prices. Non-food inflation rose 0.8% YoY but continued to see deflation in categories such as vehicles and household appliances, which saw -5.3% and -1.3% YoY inflation rates respectively in June. The NBS also release Producer Price Index (PPI) inflation data for June last week, which continued to trend upwards but remained in deflationary territory, rising from -1.4% YoY to -0.8% YoY.

US CPI inflation falls in June

US CPI inflation fell 0.1% MoM in June according to data published by the Bureau of Labor Statistics. The data was below the 0.0% MoM inflation registered in May and contributed to a decline in YoY inflation from 3.3% to 3.0%. Energy prices fell 2.0% MoM in June, offsetting a 0.2% increase in food prices. Excluding food and energy, core CPI inflation rose 0.1% MoM in June, below the 0.2% recorded in May. In YoY terms, core inflation eased from 3.4% to 3.3%. Core goods prices fell 0.1% MoM, with 0.2% and 1.5% declines respectively for new and used cars prices offsetting 0.1% and 0.2% respective increases for apparel and medical care commodities prices. Core services inflation was 0.1% MoM in June, its lowest monthly print since August 2021. A 0.5% MoM decline in transportation services prices partially offset 0.2% MoM increases in shelter and medical care services prices respectively.

UK GDP growth accelerates in May

UK GDP (Growth Domestic Product) growth rose from 0.2% MoM in May to 0.4% in June according to a monthly estimate by the Office for National Statistics. The monthly growth contributed to an accelerate in 3-month-on-3-month growth from 0.7% to 0.9%, the fastest rate of growth by this measure since January 2022. The services sector continued to drive GDP growth in May, expanding for the fifth consecutive month and maintaining the 0.3% MoM growth rate it registered in April. The strength in services sector output growth reflected strong retail trade, which rose 2.9% MoM in May having declined 1.8% in April. Production output is estimated to have grown 0.2% MoM in May following a 0.9% contraction in April. The largest contribution was 0.4% growth in manufacturing output. Construction output is estimated to have grown by 1.9% in May, following a decline of 1.1% in April, with eight out of the nine construction sectors recording growth.