Shaw and Partners

US stocks gained in a week filled with economic data releases, a number of big tech earnings and the Federal Reserve meeting. For the week the S&P 500 added 1% and the Nasdaq rose 2%. The Dow Jones was up 0.7% and logged a 13-day winning streak on Wednesday, its longest run since 1987. Growth stocks outperformed value with particular strength in technology. Alphabet and Meta both reported accelerated sales growth and saw their shares gain over 10% for the week.

Data for the week raised hopes that we will see a soft landing in the US. On Friday the Fed’s preferred inflation gauge, the core personal consumption expenditure index eased to 4.1% in June on an annualised basis, lower than expected and a 20-month low. Furthermore, wage growth increased by a slower than expected pace. The Commerce Department reported that second quarter GDP rose 2.4%, up from 2% in the prior quarter and higher than expected. The week also saw the Fed raise interest rates by 25 basis points, taking it to a 22-year high as widely expected. With the latest inflation data markets are growing more hopeful that there will be no further rate hikes this year. US Treasury yields gained for the week with the 10-year yield ending at 3.96%.

The European Central Bank also raised rates by 25 basis points, its ninth consecutive hike and taking it back to the record high last reached in 2001. President Lagarde indicated policymakers were keeping an open mind for future meetings and decisions would be data dependent. For the week the pan-European STOXX 600 was up 1.2% and had hit a 17-month high after the ECB meeting, where there are growing hopes the central bank is near the end of its tightening cycle. There were still some areas of concern. Spain’s election over the weekend was inconclusive and could provide some uncertainty. On the data front, the eurozone Composite PMI dropped to an eight-month low of 48.9 in June, while German economic growth stagnated in the second quarter. Nevertheless the German DAX index managed to reach a record high.

Japan’s Nikkei 225 added 1.4% for the week, with the yen strengthening against the US dollar. The Bank of Japan concluded its policy meeting on Friday and announced a tweak to its yield curve control policy giving it greater flexibility. In response the yield on the 10-year Japanese government bond rose as high as 0.575%, its highest level in almost nine years. Chinese equity markets were the best performers of the week, with the Shanghai Composite up 3.4% and the Hang Seng surging 4.4%. Stocks were supported by the Politburo meeting where it acknowledged that the economic recovery was making “tortuous progress” and pledged to help expand domestic demand. Details were sparse but stocks were hopeful that further stimulus would come, with property stocks some of the largest gainers.

Weekly macro highlights

Fed hikes rates in July

The US Federal Reserve (Fed) increased the target range for the Fed funds rate by 25 basis points to 5.25-5.5% at its meeting on 26 July. The Federal Open Market Committee noted that job gains have been robust in recent months with unemployment remaining low. Further, tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation, though the overall impact remains uncertain. The Fed’s goal to achieve maximum employment and an inflation rate at 2% is continuously assessed to determine the future extent of additional policy. Inflation in the US has been on a downward trend in recent months, with headline CPI at 3.0% in June. Headline PCE inflation slowed from 3.8% year-on-year (YoY) in May to 3% in June, while core inflation eased to 4.1% YoY last month, above the Fed’s 2% target. The Fed will consider the cumulative tightening of monetary policy, the lagged impact of said policy on economic activity and inflation, and economic and financial developments. Market expectations currently are for the Fed to make no changes to interest rates at its next meeting on 20 September.

ECB raises rates in July

The European Central Bank (ECB) Governing Council raised rates by 25 basis points at its meeting on 27 July with the refinancing rate rising to 4.25%. Eurozone headline inflation has been on a declining trend in recent months from 6.0% YoY in May to 5.5% YoY in June. Core inflation remained elevated at 5.5% YoY in June compared to 5.3% YoY in May. Both measures remain above the ECB’s 2% target with the Governing Council highlighting that the inflation outlook continues to be too high for too long. Regarding future monetary policy decisions, the ECB noted it will remain data dependent and ensure policy rates are brought to levels sufficiently restrictive to return inflation to its 2% target level. Market expectations are for the ECB to make no changes at its next meeting on 14 September.

BoJ tweaks yield curve control policy

The Bank of Japan (BoJ) maintained its short-term interest rate at -0.1%, as widely expected, at its meeting on 28 July. Prompting more of a market reaction, the central bank is to continue to cap the yield on 10-year Japanese government bonds (JGBs) at 0.5% however it added new language that it would regard the bounds as “references, not as rigid limits”. The central bank will also offer to buy 10-year JGBs at 1% in fixed rate operations, up from the previous 0.5%. The BoJ stated that the tweak to its yield curve control policy would allow it to respond “nimbly” to inflation risks. While Tokyo core inflation eased to 3% in July YoY from 3.2% in the prior month, it marked the fourteenth consecutive month that it had remained above the BoJ’s 2% target.