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The Week in Global Markets
Financial markets summary:
– EUROPE: European stocks saw a mixed performance this week – major pan-European indices were up week-on-week along with The German DAX, the Swiss SMI and the UK FTSE 100. At the same time, French and Italian benchmark indices declined. Disappointing earnings releases in several sectors such as technology and luxury goods, including in the US stock market, likely contributed to this performance. PMI data releases were also not encouraging as flash figures for July pointed to a fading recovery, with France and Germany posting results indicating further contraction in output. Although companies remained optimistic that business activity would rise over the coming year, sentiment dipped to a 6-month low and came in just below average. The euro and the pound depreciated against the US dollar and 10-year German and UK yields declined slightly.
– UNITED STATES: The macro data released this week indicated both strengths and weaknesses in the US economy. On the one hand, we saw better-than-expected real GDP growth, and PCE inflation aligned with expectations. On the other, new home sales and average selling prices showed that the housing market is in a slump and the S&P manufacturing PMI feel back into the contractionary zone. The S&P 500 and the Nasdaq indices dropped in the middle of the week as tech shares took a hit (e.g., Tesla and Google) after worse-than-expected earnings. The 10-year US Treasury yield declined slightly. The CME FedWatch tool now shows that there is a 0% chance that the Fed will keep fed funds at the current target range at its September meeting.
– ASIA-PACIFIC: Japanese stock indices dropped significantly this week, as tech companies took a dive similar to their US counterparts. However, the yen recorded another week of gains against the US dollar as traders likely closed short positions in the currency on expectation of another rate hike. In China, the central bank unexpectedly cut the medium-term lending facility rate for the first time since last August and as a result, Chinese banks cut the loan prime rates. This is reflective of further efforts to stimulate growth, which has been showing signs of a slowdown with a worse-than-expected performance. Real estate investments, retail sales and industrial production all slowed in June. Major stock market indices declined week-on-week.
– BITCOIN: BTC recorded more gains this week in dollar terms, reaching just over $69k on Saturday, currently around $67.8k. The first spot Ethereum exchange-traded funds (ETFs) approved in the US debuted on July 23rd and so far saw inflows of over $100m, but they have not had the same impact on BTC and ETH yet as did the launch of the spot BTC ETFs. Analysts predict that will likely also not happen in the future due to the networks’ distinct multiplier effects – Ether’s multiplier (the ratio of the change in market capitalization to the realized capitalization) is lower than Bitcoin’s and has remained low in 2024. The market value of ETH responds less to fresh inflow of investment money and ETH supply keeps rising.
policy rate overview
The People’s Bank of China (PBoC) cut its medium-term lending facility (MLF) rate by 20bp to 2.3% this week, surprising financial markets. This came after the country saw weaker-than-expected second-quarter economic data in the previous week. The property crisis continues and many indicators in industry and private consumption point to a prolonged slowdown. This is also affecting the aggregate price level as it verges on deflation. The 1-year loan prime rate (LPR) was lowered to 3.35% from 3.45% previously, while the 5-year LPR was reduced to 3.85% from 3.95%. The PBoC subsequently also lowered the rates on its standing lending facility (SLF). The higher expectations that the Fed will start easing its own policy with rate cuts in September likely also impacted the PBoC confidence in making this move.
The Bank of Canada (BaC) cut its key interest rate to 4.5% on Wednesday as expected, saying that more cuts can be expected ahead if inflation keeps decelerating. Additionally, lower retail sales and impending mortgage renewals likely also helped the bank’s decision to lower rates again. The Russian Central Bank hiked its policy rate this week by 2pp to 18% as inflation keeps rising – and the outlook was also raised. The bank now expects that inflation will remain between 6.5–7.0%, well above its 4% target, during 2024. The official statement was that, for inflation to begin decreasing again, monetary policy needs to be tightened further.
The Hungarian National Bank decreased its key interest rate by another 25bp to 6.75%, in line with expectations. The overnight deposit rate was also reduced, to 5.75%, while the collateralised loan rate was cut to 7.75%. The central bank statement said that the inflation outlook remains consistent with the June forecast update but that the “volatile financial market environment, significant geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach”.
The Turkish central bank kept rates unchanged at 50% following news earlier in July that the country’s high inflation was slowing for the first time in 8 months. Turkey’s annual consumer inflation hit 71.6% in June after reaching an 18-month high of 75.45% in May. The central bank revised its year-end projections on inflation from 36% to 38% in May. Leading indicators suggest that monthly inflation will rise temporarily in July, according to the bank’s statement, but this rise is expected to be limited.
highlights from Germany
Back in contraction territory
German composite PMI slipped below the 50 mark again in July, with service activity expansion slowing down and a further drop in manufacturing performance – with no improvement in sight. This is the first contraction in 4 months driven by a deeper decline in manufacturing production – there was clear weakness in manufacturing new orders (the steepest rate of contraction in 3 months) and a reduction in the backlogs of work. Staffing capacity was scaled back further. There was also an uptick in input price inflation as operating costs in the service sector rose faster. Unlike costs, the rate of inflation ticked down since June. July’s flash data showed a slight improvement in business expectations from the month before. According to the report, “The elephant in the room is the various structural issues. With respect to the manufacturing sector, the main structural challenges include labor market shortages, an investment backlog in infrastructure, a lack of digitalization, and relatively high energy prices. However, the most significant factor impacting the German manufacturing sector is the increasing loss of global market share of German car and machinery producers to competitors in China. Unfortunately, this problem is here to stay.”
Sentiment confirms the souring and recession risks
The ifo business sentiment survey gave an indication similar to what we saw in the flash PMIs – the business climate is deteriorating again and the cycle indicator is flashing red indicating a contraction. Companies are less satisfied with the current situation and more skeptical about the coming months: the economy can’t catch a break and is stuck in crisis. In all main sectors – manufacturing, services, trade and construction, the assessment of the current business environment is worse and expectations have turned more pessimistic than in previous months. The recovery we’ve been seeing in the last few months has clearly hit a major setback.
Consumer sentiment rising but still negative
The GfK consumer sentiment indicator rose notably in July and the forecast for August is up by 3.2pt, albeit still in the negative zone. The willingness to buy, as well as income and economic expectations, edged up, while the willingness to save ticked slightly down. Income optimism was likely supported by the further deceleration of inflation and the noticeable wage and salary increases as well as significant pension increases, driving real income growth. The rise in the propensity to purchase is attributed to the effects of the Euro 2024, although it still remains at levels below that of the pandemic lockdowns. However, German citizens still think that the economy will struggle to recover in the coming 12 months, as there is uncertainty and relatively weak growth ahead.
highlights from Europe
Recovery fades
Flash PMI for July showed a near-stagnation of the eurozone private sector. New orders fell for the second month in a row and business confidence dropped to a 6-month low, leading firms to halt a spell of hiring which began at the start of 2024. The rate of input cost inflation accelerated, but demand weakness meant that companies raised their selling prices at a softer pace (the slowest since last October). The main cause of the contraction was the manufacturing sector where production was markedly down, driven by drops in France and Germany. The growth in service sector activity slowed down.
Inflation expectations remain contained
Median expectations for inflation in the euro area over the next 12 months remained unchanged at 2.8%, and expectations for inflation 3 years ahead were also unchanged in June, at 2.3%. Inflation expectations at the one-year and three-year horizons remained below the perceived past inflation rate. Consumer nominal income growth expectations increased to 1.4% while expectations for nominal spending growth over the next 12 months remained stable at 3.3%. However, spending growth expectations across income quintiles diverged, with a decrease for the lowest two quintiles and an increase or stability for the highest three income quintiles. Economic growth expectations for the next 12 months turned more negative, standing at -0.9%, compared to -0.8% in May. Expectations for the unemployment rate 12 months ahead decreased to 10.6%, from 10.7% in May. The lowest income quintile continued to report the highest expected and perceived unemployment rate, as well as the lowest economic growth expectations. The expectation for the prices of homes is an increase by 2.7% over the next 12 months, slightly higher than in May.
Monetary growth speeds up
According to the latest ECB release for June, M1 (currency in circulation + overnight deposits): grew by an annual rate of -3.4%. M2-M1 (short-term deposits other than overnight deposits) annual growth was lower at 12.7%, while M3-M2 (marketable instruments) annual growth rose to 18.6%. Overall, the annual growth of M3 rose to 2.2%. With regard to lending, adjusted loans to the private sector grew at a faster annual rate of 1.1%; for loans to households, growth was unchanged at 0.3%; for loans to non-financial corporations: growth rose to 0.7%.
highlights from The United States
Output growth accelerates, but manufacturing disappoints
The flash S&P Global PMI for July shows that US business activity growth edged up to its fastest for 27 months. Growth disparities widened, however, with the service sector leading the upturn while manufacturing output slipped into decline for the first time in 6 months. Employment grew at a slower rate and business confidence in the outlook fell for a second month. This was likely driven by the political uncertainty around the presidential election. Measured overall, inflows of new work rose at a slightly reduced rate, caused by a renewed fall in new orders at manufacturers. Average prices charged for goods and services rose at the slowest rate since January. While some stubbornness of inflation was still evident in the service sector, prices charged for services rose on average at the slowest rate for almost 4 years. The slower rise in charges occurred despite upward pressure on input price inflation. Average costs across manufacturing and services rose at the sharpest rate for four months, rising in both sectors at increased rates.
Growth accelerates more than expected
The first Q2-24 estimate of US GDP real growth is 2.8%, which exceeded consensus estimates of 2% and was higher than the Q1 rate. As usual, personal consumption was the main driver while net exports had a negative contribution. Private inventories, fixed investment and government spending also made a positive contribution.
The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributors were health care, housing and utilities, and recreation services. Within goods, the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, and gasoline and other energy goods. The increase in private inventory investment primarily reflected increases in wholesale trade and retail trade industries that were partly offset by a decrease in mining, utilities, and construction industries. Within nonresidential fixed investment, increases in equipment and intellectual property products were partly offset by a decrease in structures. The increase in imports was led by capital goods, excluding automotive.
US core PCE inflation holds steady
Inflation measured by the change in the Personal Consumption Expenditures (PCE) Price Index, ticked down to 2.5% YoY in June, while it rose by 0.1% MoM. Core PCE rose 2.6% YoY, the same as May’s increase but above expectation (2.5%), and accelerated MoM to 0.2%. This was mostly by services. This is now making it more likely that the Fed will do 2 rate cuts by year-end, and that the first one will take place after the September meeting, for which the market now prices in 0% chance of staying at the current fed funds target range.
highlights from The United Kingdom
Solid expansion
Private sector activity in the UK grew at a faster rate in July, with the strongest upturn in new business for 15 months and a strengthening of business confidence. Services activity growth accelerated slightly while manufacturing output rose most significantly since Feb-22. Manufacturing companies mainly increased output due to stronger order book volumes, whilst also maintaining efforts to reduce outstanding workloads. Activity growth among services firms quickened slightly in July, supported by a much faster increase in new work compared to June. That said, the pace of activity expansion was still among the softest recorded in 2024 to-date. Input cost inflation in the UK private sector was among the softest observed since the beginning of 2021. Prices charged inflation slowed to its weakest since Feb-21, driven by a softer increase in output charges at services companies.
Author: Nikolay
Founder of MoneyCraft
