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The Week in Global Markets
Financial markets summary:
– EUROPE: As global stock markets sold off this week on concerns about the US economy and tech earnings, European stocks were similarly affected. Major country and pan-European indices dropped between about 3 and 5.3%. Regarding corporate earnings of European stocks, 5.3% of companies so far have reported positive earnings surprises, but the net beat is lower compared to Q1. However, the revenue situation is not that optimistic – growth in the most recent reports has been close to 0%, so the revenue stagnation persists. In 7 out of 11 sectors earnings are growing YoY (especially utilities and financials), similar to the US trend. But the European tech sector saw a significant 30% drop. In terms of revenue, only 5 sectors are growing. Government bond yields of 10y German and UK bonds declined significantly this week, while the euro appreciated against the USD. The pound depreciated against the USD and the EUR as the Bank of England lowered its bank rate by 25bp.
– UNITED STATES: This week saw negative macro surprises in US data releases – job growth slowed, unemployment increased, and the ISM manufacturing index fell further into contractionary territory. Markets reacted with a significant sell-off – the Dow fell over 850 points, the Nasdaq fell over 580 points and the S&P 500 dropped over 112 points. Sector-wise, the biggest drops in the S&P 500 were in tech as Q2 earnings results disappointed, as well as energy, consumer discretionary and financials. Additionally, Saturday’s earnings report from Warren Buffett’s Berkshire Hathaway revealed that the conglomerate sold about half of its stake in Apple and as a result, its cash pile rose to $277bn in Q2. Long-term interest rates dropped sharply after the ISM manufacturing print and the jobs data release, sending the yield on the benchmark 10y Treasury note to its lowest intraday level (3.79%) since Dec-23.
– ASIA-PACIFIC: Japenese stock markets followed their US and European counterparts into significant losses this week, likely compounded by the decision of the Bank of Japan to hike its policy rate by 15bp and to reduce JGB purchases by about JPY 400bn each quarter. The Nikkei 225 Index dropped 4.67% and the broader TOPIX Index went down by 6%. The yen, however, continued to strengthen against the USD, hitting earnings expectations for Japan’s export-oriented companies. In China, equities had a more mixed performance – the Shanghai Composite Index gained 0.5% while the CSI 300 lost 0.73%. Manufacturing PMI had a third month in a row in contractionary territory, reaching 49.4 in July. Profits of industrial firms rose by 3.6% YoY in June, however, domestic demand remained weak, raising expectations for further stimulative measures by the government.
– BITCOIN: BTC has been falling precipitously throughout the week, reaching a low of just below $60k on Saturday, before recovering slightly to around $61k at the time of writing. These moves were likely driven by the negative macro data in the US and the risk-off sentiment across other markets such as equities. Further contributing to the bearish action was the movement of 16.6k Bitcoin (roughly $1.1bn) and 166.3k ETH (roughly $521m) from wallets linked with the bankrupt Genesis Trading, most likely for in-kind repayments to creditors.
policy rate overview
The Federal Reserve kept its fed funds rate unchanged this week. And while the prepared statements did not provide any forward guidance, Fed Chair Jerome Powell stated that a reduction in the policy rate could be “on the table as soon as the next meeting in September“. He said that they are getting closer to the point at which it will be appropriate to reduce our policy rate, but they are not quite at that point. The FOMC view is that the labor market is strong, but not overheated. Powell also indicated that the economy is not “overheating” but is “normalizing” – implying that, even though the timing is unknown, the direction of the next move would most likely be down. According to the CME FedWatch tool, futures markets ended the week pricing in a 73.5% chance of a 50bp rate cut at the next Fed meeting in September.
The Bank of England cut by 25bp down to 5%, but the decision was not unanimous – it was a split 5-4 vote in favor of the cut. Governor Bailey indicated that policymakers were not about to start a rapid succession of cuts because they need to make sure first that inflation stays low and be careful not to cut interest rates too quickly or by too much. Analysts expect that another rate cut may be coming in November as inflation might fall below target by then.
The Bank of Japan hiked the short-term policy rate to 0.25% from 0-0.1% – the highest level in 15 years. BoJ Governor Kazuo Ueda did not rule out another hike in the course of 2024 and stressed the bank’s readiness to keep increasing borrowing costs to levels deemed neutral to the economy. This helped push the yen further below the 150 mark against the dollar. The BOJ also decided on a quantitative tightening plan that would reduce monthly bond buying in half to JPY 3tn as of January-March 2026. This would shrink the BOJ’s $3.9tn balance sheet by up to 8%, the central bank said, trying to unwind the assets accumulated during a controversial era of bond buying that began in 2013 and is thought of as the main culprit for the distortions in Japanese markets.
highlights from Germany
The rest of Europe grows but not Germany
When it comes to the most recent Q2 growth estimates, the situation in Germany can probably best be described as unexpected but not unpredictable. As consensus forecasts pointed to 0-0.1% real GDP growth, the first flash numbers were negative at -0.1% QoQ, i.e., the economy is shrinking again. The full breakdown is not yet available, but the German Statistical Office reported that, in particular, investments in equipment and buildings, adjusted for price, seasonal and calendar effects, decreased QoQ. On a price and calendar-adjusted basis, Q2 GDP growth was also -0.1% compared to Q2-23. Note that historical growth figures for most quarters going back to pandemic times were revised.
Stubborn inflation
In another not-so-pleasant surprise this week, preliminary inflation data showed another tick-up unexpectedly. Monthly and annual inflation rates (provisional), measured using both the CPI and HICP, came in higher than consensus forecasts for July:
– Headline CPI: +2.3% YoY / +0.3% MoM
– Core CPI: +2.9% YoY
– Harmonized CIP: +2.6% YoY / +0.5% MoM
Food and goods inflation accelerated a bit, while energy is less negative vs. Jun. Core services remained at the same high annual rate of 3.9%.
Rising unemployment
As a result of the weak economy, the number of unemployed persons in Germany rose more sharply in July than is usual for the start of the summer break. The Federal Employment Agency (BA) registered almost 2.81m unemployed, i.e., 82k more than in June and a good 190k more than a year ago. The unemployment rate rose by 0.2pp to 6%. After taking seasonal effects into account, the number of unemployed persons rose by 18k MoM. In July, more short-time work was reported than in the previous month. According to BA projections, the number of people claiming short-time work benefits recently fell to 211k. 903k people received unemployment benefits in July, 105k more than a year earlier. The number of employable people entitled to Bürgergeld was around 4.02m in July, 75k more than a year earlier.
highlights from Europe
Growth continues to be positive across most of the Eurozone and the EU
The flash data released by Eurostat this week showed that, except for Germany, Latvia, Hungary and Sweden, most of the EA/EU is growing. The real GDP growth rate was +0.3% QoQ in both, and +0.6%/+0.7% in the EA/EU compared to Q2-2023. These numbers are based on incomplete data sources and are subject to revisions. Among the Member States for which data are available for Q2-24, Ireland (+1.2%) recorded the highest increase vs. Q1, followed by Lithuania (+0.9%) and Spain (+0.8%). The highest declines were recorded in Latvia (-1.1%), Sweden (-0.8%) and Hungary (-0.2%).
Inflation higher than expected
The July flash estimate shows that both headline and core inflation, measured by the HICP, were higher than the consensus forecasts, at 2.6% and 2.9% YoY, respectively. The services component is expected to have the highest annual rate in July (4.0%), followed by food, alcohol & tobacco (2.3%), energy (1.3%) and non-energy industrial goods (0.8%).
Sentiment stable, expectations drop
The Economic Sentiment Indicator for July was stable for the EU and EA but the expectations indicator dropped significantly for both. It reached levels below the long-term averages for the first time since April 2021. Confidence in industry remained broadly stable. Amongst the largest EU economies, the ESI deteriorated markedly in France (-2.2) and Poland (-1.8), while it improved strongly in Spain (+1.7) and, less so, in Italy (+0.4). Economic sentiment remained broadly stable in Germany (+0.2) and the Netherlands (-0.2).
Services confidence declined (-0.9) due to a worsening of managers’ demand expectations and assessments of the past business situation, while their assessment of past demand remained virtually unchanged. Consumer confidence rose (+0.7), reflecting improvements in all 4 components (i.e. consumers’ views on their household’s past and expected financial situation, expectations about the general economic situation in their country and intentions to make major purchases). Retail trade confidence (-1.1) decreased markedly, owing to a substantial decline in retailers’ assessments of the past and future business situation, while their assessment of their volume of stocks remained broadly stable. Construction confidence improved slightly.
The Employment Expectations Indicator (-1.6) fell below its long-term average, reflecting a significant worsening of employment plans among industry and services managers. Selling price expectations picked up in industry and retail trade, while edging down in services and construction. In industry and construction, selling price expectations score very close to their long-term average, while they are still well above it in retail trade and, in particular, services.
highlights from The United States
Hirings and quits are down, unemployment is up
The latest JOLTs report for June shows that the private sector hiring rate fell to 3.7%, while both the quits rate and layoffs rate fell. This means that the US labor market keeps loosening.
– Job openings: 8.18m (-46k)
– Hiring: 5.34m (-314k)
– Quits: 3.28m (-121k)
– Layoff: 1.42mn (-175k)
Hiring is at levels last seen at the start of the pandemic, while job openings remain above pre-pandemic levels but have been moderating from their post-pandemic high. It is important to note that private jobs saw another decline, which was almost fully offset by an increase in government job openings.
The unemployment rate rose to 4.3% in July (the highest since 2021), and nonfarm payroll employment edged up by 114k (less than the expected 175k). There were also downward revisions for May and June. Wage growth slowed to 3.6% YoY. The labor market data and the Fed statement this week seem to have sparked a significant shift in expectations, with the probability of a 50bp rate cut by the Fed in September rising to 70%.
Confidence rose slightly but the Present Situation index was down
The Conference Board Consumer Confidence Index increased in July to 100.3 but consumers still appear to be concerned about elevated prices and interest rates, and uncertainty about the future; things that may not improve until next year. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions — declined to 133.6 from 135.3 in June. Meanwhile, the Expectations Index — based on consumers’ short-term outlook for income, business, and labor market conditions—improved in July to 78.2, up from 72.8 in June but still below 80 (the threshold which usually signals a recession ahead).
The CB report indicates that, compared to last month, consumers were somewhat less pessimistic about the future. Expectations for future income improved slightly, but consumers remained generally negative about business and employment conditions ahead. Meanwhile, consumers were a bit less positive about current labor and business conditions. Potentially, smaller monthly job additions are weighing on consumers’ assessment of current job availability.
highlights from The United Kingdom
Mortgage and business borrowing increased, while consumer credit declined a bit
The annual growth rate for net mortgage lending rose to 0.5% in June. Net mortgage approvals (net of cancellations) for house purchases, which is an indicator of future borrowing, remained broadly stable at 60k. The ‘effective’ interest rate on newly drawn mortgages saw a slight increase of 3bp, to 4.82% in June. Similarly, the rate on the outstanding stock of mortgages rose by 4bp to 3.65%. Net consumer credit borrowing dipped slightly in June to £1.2bn – the annual growth rate for all consumer credit was 8%. The annual growth rate for credit card borrowing fell to 10.5%, while the annual growth rate for other forms of consumer credit also dipped to 7.0%.
The annual growth rate of borrowing by large businesses bounced back to 2.5%, while borrowing by SMEs also increased to -4.3%. The average cost of new borrowing from banks by UK private non-financial companies was 6.85% in June, a 33bp decrease from 7.18% in May. Over the same period, the effective interest rate on new loans to SMEs was 7.53%, a 29bp decrease from 7.82%. PNFCs raised, on net, £6.7bn of finance in June, an increase from £4.2bn in May. This was driven by £4.0bn of net bond issuance and £3.6bn of loans by banks and building societies. This was partially offset by £1.2bn of equity buybacks.
The net flow of sterling money (M4ex) amounted to £4.1bn in June, up from £3.4bn in May. The net flow of M4ex was largely driven by households’ holdings of money, which increased to £8.4bn in June, compared to a £6.5bn increase in May. The flow of sterling net lending to private sector companies and households (M4Lex) increased to £3.7bn.
House prices keep rising
In July, the growth in house prices accelerated further, according to the Nationwide Index. The growth rate rose to 0.3% MoM, while the annual growth rate reached 2.1%. However, prices are still about 2.8% below the all-time record levels reached in the summer of 2022. Housing market activity has been relatively steady recently. Investors expect Bank Rate to be lowered modestly in the years ahead, which, if correct, will help to bring down borrowing costs. However, the impact is likely to be fairly modest as the swap rates that underpin fixed-rate mortgage pricing already embody expectations that interest rates will decline in the years ahead. As a result, affordability is likely to improve only gradually through a combination of wage growth outpacing house price growth (which is expected to remain fairly flat), with some support from modestly lower borrowing costs.
Author: Nikolay
Founder of MoneyCraft
