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Earnings season was in focus and amongst notable reporters were Tesla and Alphabet. However, the pair’s earnings disappointed and this sparked a sell-off on Wednesday, particularly concentrated in tech names. According to Dow Jones Market Data, the Magnificent Seven group of tech mega-caps collectively lost $768bn in market value for the session. Optimism over artificial intelligence (AI) had been a key driver of gains for much of the year, however Alphabet’s earnings prompted doubts over AI spending and so other reports from tech giants this week will be closely monitored. Wednesday marked the worst session for the S&P 500 since December 2022, down 2.3%, while the Nasdaq Composite lost 3.6% in its biggest drop since October 2022.

There was also the release of the Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index. On a monthly basis the core PCE index rose 0.2% and year-on-year (YoY) it held at 2.6%, raising expectations that the central bank will begin to cut interest rates from its September meeting. Stocks staged a rebound on the final day of trading for the week, following a string of negative sessions. Despite this, the Nasdaq lost 2.1% for the week and the S&P 500 fell 0.8%. In contrast, in a sign of investors looking beyond big-tech and rotating, the Dow Jones Industrial Average was up 0.7%, while faring even better was the small-cap Russell 2000, up over 3%.

European markets also experienced a mid-week dip, following the tech decline seen in the US but also pressured by their own underwhelming earnings. One such area that disappointed was the luxury sector, particularly LVMH which reported a 14% sales slump in key Asian markets for the second quarter, and peer Kering saw a fall in underlying operating profit. However, luxury names did stage a comeback on Friday, with Hermes seeing slightly better-than-expected second quarter sales. For the week, the pan-European STOXX 600 added 0.6%, mainly due to gains seen on Friday. Regional performance was mixed with German and UK major indices up while French and Italian indices dropped.

Japanese equities had a tough week, pressured by the slump in US tech shares as well as ongoing yen strength. The Nikkei 225 sank 6% for the week and entered a technical correction, seeing a 3.3% slump on Thursday, its biggest drop since June 2021. The yen had been trading at around a two-and-a-half month high, with short positions being unwound. It was also fuelled by growing beliefs of a narrowing of the interest differential between the US and Japan, with the Bank of Japan to meet this week. Chinese equities also lost ground with the Shanghai Composite losing over 3% and the Hang Seng down 2.3%. Confidence over the economic recovery is shaky, with the latest GDP figure slowing for the second quarter, and stocks failed to cheer surprise interest rate cuts from the People’s Bank of China.

Weekly macro highlights

US GDP growth accelerates in Q2

US GDP growth rose from an annualised 1.4% quarter-on-quarter (QoQ) in Q1 to 2.8% in Q2 according to an advance estimate published by the Bureau of Economic Analysis (BEA). The data was above market expectations for 2.0% growth and reflected stronger consumption, private inventory investment, and non-residential fixed investment. PCE contributed 1.57 percentage points to the 2.8% annualised QoQ GDP increase, with goods and services spending accounting for 0.55 and 1.02 percentage points respectively. Fixed investment contributed 0.64 percentage points to GDP growth, with a 0.69 percentage point contribution from non-residential investment offsetting a 0.05 percentage point detraction by residential investment. Private inventory investment added 0.82 percentage points to GDP growth, while net exports detracted 0.72 percentage points as imports, which are a subtraction from GDP, increased. The BEA also published PCE inflation data for June last week, with core inflation unchanged at 2.6% YoY, above market expectations for a decline to 2.5%.

Tokyo inflation eases in July

Tokyo CPI inflation, a strong leading indicator for nationwide inflation in Japan, eased from 2.3% YoY in June to 2.2% in July. Softer headline inflation in July reflected a decline in fresh food inflation from 7.9% YoY to 2.7% YoY. Core inflation, which excludes fresh food in Japan, rose from 2.1% YoY to 2.2%. Goods inflation, excluding fresh food, rose from 3.7% YoY to 4.3% and offset a decline in services inflation from 0.9% YoY to 0.5%. The data marks the final inflation release in Japan before the Bank of Japan (BoJ) meeting on 31 July. At its meeting in June, the BoJ Policy Board announced it would provide guidance at its July meeting on a plan to reduce the Bank’s purchases of Japanese government bonds (JGBs). In addition to tapering its purchases of JGBs, markets assign around a 70% probability to an increase in interest rates at the BoJ meeting this week.

China’s central bank cuts interest rates in July

The People’s Bank of China (PBoC) reduced its short-term interest rate by 10 basis points on 22 July, with the 7-day reverse repo rate falling from 1.8% to 1.7%. Changes of identical magnitude were made to the 1-year and 5-year loan prime rates, which were reduced from 3.45% and 3.95% respectively to 3.35% and 3.85% respectively. Additionally, the PBoC reduced the medium-term lending facility rate by 20 basis points from 2.5% to 2.3% on 25 July. The easing of monetary policy follows a period of softer data in China. Headline inflation fell from 0.3% YoY to 0.2% in June, remaining below the government’s 3% target for the 50th consecutive month. Q2’s GDP data provided further evidence of subdued domestic demand. GDP growth slowed from an annualised 1.5% QoQ in Q1 to 0.7% in Q2 and the contribution of gross capital formation to quarterly GDP growth increased while that of final consumption expenditure slowed.