Shaw and Partners

A change in investor sentiment last week saw a rotation away from mega-cap technology stocks into other parts of the market, such as small-caps and value stocks, which had underperformed year-to-date. Small-caps outperformed large-caps companies by 6% in July, as investors start to price-in a rate cut by the Federal Reserve in response to softer US inflation in June. Value stocks, outpaced growth stocks by 4.7% last week, the largest divergence since March 2023.

The underperformance of growth stocks followed news that the US was considering further tightening restrictions on exports of semiconductor equipment to China. This news magnified the sell-off of firms such as NVIDIA, Taiwan Semiconductor Manufacturing Company (TSMC) and Broadcom during the week. Investors pointed to a broadening out of gains in the US market, which had been reliant on a few large companies so far in 2024. Stocks finished down last week as news of a global IT outage hit services firms and created disruptions to the operations of airlines, banks and financial services firms.

US economic data continued to surprise on the upside, with an increase in industrial production by 0.6% in June, ahead of markets expectations, and strong business activity. However, regional surveys by the New York Fed and the Philadelphia Fed highlighted that current manufacturing conditions remain weak. Prices paid indicators for the sector continue to point to moderate price pressures, which is consistent with the expectations for upcoming Fed rate cuts.

In Europe, stocks ended down by 2.7% as measured by the STOXX Europe 600 index amid rising trade tensions between US and China. The euro fell against the US dollar last week to $1.0887 after the European Central Bank (ECB) kept rates on hold as expected but left the door open to a September cut, following its downgrade view of the Eurozone economic outlook.

Weekly macro highlights

UK inflation unchanged in June

UK Consumer Price Index (CPI) inflation was unchanged at 2.0% year-on-year (YoY) in June, slightly above market expectations for a decline to 1.9% but in line with the Bank of England’s (BoE) Monetary Policy Report projection made in May. Goods inflation fell from -1.3% YoY in May to -1.4% in June. This largely reflected a decline in clothing and footwear inflation from 3.0 YoY to 1.6% YoY and in food and non-alcoholic beverages inflation from 1.7% YoY to 1.5%. Services inflation was unchanged at 5.7% YoY in June, with the BoE having expected it to be 5.1% when they produced their last set of forecasts in May. Services inflation is one of the key indicators the BoE has been watching as a measure of domestic underlying inflationary pressures and last week’s data reduces the likelihood of an interest rate cut at the next Monetary Policy Committee meeting on 01 August.

China’s GDP growth slows in Q2

China’s GDP growth slowed from 1.6% quarter-on-quarter (QoQ) in Q1 to 0.7% in Q2 according to data published by the National Bureau of Statistics. The quarterly slowdown was also reflected in year-on-year (YoY) data, with GDP growth slowing from 5.3% YoY to 4.7% in Q2, below market expectations for a smaller decline to 5.1%. There was a notable decline in the contribution of final consumption expenditure to QoQ GDP growth. Having accounted for 73.7% of QoQ GDP growth in Q1, consumption accounted for just 46.5% of growth in Q2. A decline in YoY retail sales from 3.7% in May to 2.0% in June emphasised the lack of momentum in domestic demand. The share of GDP growth accounted for by gross capital formation rose from 11.8% in Q1 to 40.1% in Q2. Net exports’ share of GDP growth declined slightly from 14.5% in Q1 to 13.3% in Q2, significantly above its -11.4% contribution in 2023.

ECB leaves rates unchanged in July

The ECB Governing Council left interest rates unchanged at its meeting on 18 July, with the Deposit Facility Rate (DFR) remaining at 3.75%. Having reduced interest rates by 25 basis points at its meeting on 06 June, the decision to leave rates unchanged in July was widely expected. In its post-meeting statement, the ECB noted that “the Governing Council is not pre-committing to a particular rate path”. Despite both goods and services inflation being unchanged at 0.7% and 4.1% YoY in June, President Lagarde highlighted that most measures of underlying inflation “were either stable or edged down in June”. The ECB President also noted that “risks to economic growth are tilted to the downside”. In line with the ECB’s assessment of declining underlying inflation and downside risks to growth, markets assign around a 65% probability to a rate cut at the next Governing Council meeting on 12 September.