Shaw and Partners

US stocks continued to build distance from the recent sharp sell-off and posted their best weekly performance of the year. The dip had been attributed to a weaker-than-expected jobs report which raised questions over whether the Federal Reserve (Fed) has been too slow off the mark for rate cuts and may be forced to be more aggressive than previously anticipated, however a string of upbeat data releases for the week helped to allay the fear of deeper cuts. There was much focus on the inflation readings, with the producer price index rising by less than expected in July, at 0.1% month-on-month and services prices saw their biggest decline since March 2023 and then the consumer price index cooled. In addition, there was support from retail sales numbers and jobless claims calming recession fears.

For the week, the S&P 500 added 3.9%, the Dow Jones up 2.9% and the tech-heavy Nasdaq climbed 5.3%. Tech was one of the strongest sectors, particularly thanks to Nvidia which was up nearly 19% as it continued to bounce back. The consumer discretionary sector was also notably strong, helped by Walmart’s upbeat earnings results while Starbucks surged on the announcement of its new CEO. Although the yield on the 10-year Treasury note jumped higher on Thursday after the strong retail data, it had been trending lower for most the week and managed to end at 3.89% compared to 3.94% the previous week. Attention will be paid to Fed chairman Jerome Powell’s speech at this week’s Jackson Hole conference for any policy clues.

The paring back of US recession concerns also carried across to European markets. The pan-European STOXX 600 rose 2.5% for the week, seeing its best performance since early May. Similar to the US, the tech sector was a strong performer, logging its longest winning streak in around six months. The eurozone economy expanded 0.3% in the second quarter, matching the pace of the first. In the UK, gross domestic product (GDP) was up 0.6% for the same period, remaining resilient after the technical recession in the second half of 2023.

China’s economic rebound looked less rosy however, with industrial production and fixed asset investment missing expectations. On the bright side retail sales saw a better-than-expected increase and despite the mixed picture Chinese equities saw slight gains for the week. The Shanghai Composite was up 0.6% while the Hang Seng added around 2%. It was a holiday shortened week for Japanese markets however, that did not stop the Nikkei 225 from surging 8.7%, with volatility around the Bank of Japan’s July hike stabilising. There was support from a weakening yen as well Japan’s GDP growing by an above expectation 0.8% quarter-on-quarter.

Weekly macro highlights

US inflation eases in July

US consumer price index (CPI) inflation eased from 3.0% year-on-year (YoY) in June to 2.9% in July, slightly below market expectations for a repeat of June’s inflation print. In month-on-month (MoM) terms, inflation rose 0.2% in July following a decline of 0.1% in June. Within this, food prices rose 0.2% on the month and energy prices were unchanged as a 0.1% MoM increase in energy commodities prices was offset by a 0.1% MoM decrease in energy services prices. Excluding food and energy prices, core CPI inflation rose 0.2% MoM in July, above the 0.1% registered in June. Shelter prices, which rose 0.4% MoM in July and have a 46% weight in the core CPI, accounted for around 90% of the increase in core inflation. Partially offsetting the increase in shelter prices was a 2.3% MoM decline in used cars and trucks prices. In YoY terms, core CPI inflation eased from 3.3% to 3.2%.

UK inflation rises in July

UK consumer price index (CPI) inflation rose from 2.0% year-on-year (YoY) in June to 2.2% in July, below market expectations for an increase to 2.3%. Housing and household services made the largest positive contribution to the monthly change in YoY inflation, accounting for 0.45 percentage points of the 0.20 percentage point increase. This largely reflected an unfavourable base effect for gas and electricity prices, which resulted in housing and household services prices falling 1.5% YoY in July, up from the 4.7% decline in the 12 months to June. Food and non-alcoholic beverage prices and alcohol and tobacco prices rose 1.5% and 7.3% YoY respectively in July, both unchanged from June. Excluding food, energy, alcohol and tobacco, core CPI inflation fell from 3.5% YoY in June to 3.3% YoY in July, below market expectations for a 3.4% YoY increase. Services prices, which the Bank of England has been monitoring closely, fell from 5.7% YoY to 5.2% YoY.

Eurozone GPD growth unchanged in Q2

Eurozone gross domestic product (GDP) rose 0.3% quarter-on-quarter (QoQ) in Q2 according to a flash estimate published by Eurostat. The growth rate registered in Q2 was the same as in Q1 and was in line with market expectations. Within the eurozone, Germany’s GDP contracted by 0.1% QoQ, having expanded 0.2% QoQ in Q1. France and Spain maintained the same GDP growth rates in Q2 as in Q1, at 0.3% QoQ and 0.8% QoQ respectively. Italy’s GDP growth slowed from 0.3% QoQ in Q1 to 0.2% QoQ in Q2. In year-on-year terms, eurozone GDP growth accelerated from 0.5% to 0.6% in Q2. Despite the YoY GDP growth acceleration, industrial production data highlighted continued struggles in the manufacturing sector, with output falling from -2.9% YoY in May to -3.9% YoY in June. Eurostat also published employment growth data for Q2, showing the number of employed persons in the eurozone increased by 0.2% compared with Q1.