July 24, 2023
The FTSE led the way this week with a rise of 3.08%.
As we’d hoped, the FTSE kicked into gear this week with a rise of over 3% after falling fuel, milk, cheese and eggs prices have helped a surprise drop in inflation.
The rate of price rises has dropped to 7.9% in the year up to June, down from 8.7% last month.
Economists had predicted the CPI would only fall to 8.2%, but falling petrol and diesel costs, and a slowing down in food price rises, led to a larger-than-expected drop.
Also falling was the cost of raw materials - they dropped 2.7% in price - the first time they've actually become cheaper since late 2020, the ONS said.
The price of goods leaving factories grew 0.1%, down from a rise of 2.7%.
It takes time for input prices to feed through to consumer prices but this is now happening and becoming more widespread. On a month-to-month basis, producer prices have been falling since March and the consumer price index has been slowing since April.
Beyond energy and food, the core CPI is an indication of how embedded inflation has become in the rest of the consumer’s market basket. The annual rate of core CPI fell from 7.1 per cent in May to 6.9 per cent in June.
This is still too high for the BoE to relax but at least core CPI has finally turned a corner. Another measure watched by the BoE is serviced annual CPI, where most jobs are found and where wage costs are most significant. This, too, fell from 7.4 per cent in May to 7.2 per cent in June.
This along with a resilient retail sales number helped the UK markets rally while at the same time stopping the charge of the ever-stronger British pound.
Sterling depreciating relative to the U.S. dollar helps increase the value of the top 100 UK companies as the index includes many multinational companies with overseas revenues.
The pound had been up almost 10% against the dollar over the last 12 months, which has been problematic for the FTSE, but that has now dropped back down to around 7%. We feel the slightly more realistic interest rate expectations have brought this now more in line with what we would expect.
The pan-European STOXX Europe 600 Index ended the week 0.95% higher on hopes that evidence of slowing inflation on the continent could herald the end of monetary policy tightening.
Most major Continental stock indexes rose modestly. Italy’s FTSE MIB advanced 0.67%, France’s CAC 40 Index gained 1.94%, and Germany’s DAX added 0.45%.
European government bond yields broadly ticked lower for the same reasons. Yields on Italy’s 10-year sovereign bonds briefly dropped below a one-month low of 4% and in the UK, yields on 10-year government bonds also declined slightly, ending the week at 4.28%.
The eurozone economy avoided a recession in the first quarter of this year, with revised figures showing it remained unchanged instead of contracting as previously estimated. Gross domestic product was flat in the first three months of the year, up from a prior estimate of a 0.1% contraction.
Two of the leading hawks in the European Central Bank, Dutch central bank governor Klaas Knot and Bundesbank chief Joachim Nagel, appeared to moderate their stance on future interest rate increases.
In the US most of the major equity indexes advanced on hopes that the tight labour market and moderating inflation would help the economy avoid a hard landing. The tech-heavy Nasdaq Composite, however, suffered a modest pullback. Value stocks outperformed their growth counterparts in the large-cap Russell 1000 Index.
Retail sales ticked up 0.2% sequentially in June, a slower pace than the 0.6% consensus estimate reported by FactSet. Upward revisions to the May data raised the growth rate for that month to 0.5% from the initial reading of 0.3%.
New filings for unemployment benefits fell for a second consecutive week and by more than economists had expected, with initial claims reaching their lowest level since May.
U.S. Treasury Secretary Janet Yellen says that she does not expect the U.S. to lapse into recession, citing the labour market’s resilience and slowing inflation.
Meanwhile, the Conference Board’s Leading Economic Index, a forward-looking gauge of U.S. economic activity, decreased for a 15th consecutive month in June—the longest string of sequential declines since 2007–2008. This is certainly a sign of caution, but so far global economies have held up better than expected.
U.S. Treasury yields were little changed on the week, as investors appear to have priced in a near certainty of another Federal Reserve rate hike at the central bank’s July 25–26 policy meeting.
Japan’s stock markets registered mixed performance for the week, with the Nikkei 225 Index falling 0.3% and the broader TOPIX Index gaining 1.0%. The sentiment was largely driven by investor caution ahead of the Bank of Japan’s (BoJ’s) July 27–28 monetary policy meeting and a slight dampening in expectations that the central bank would tweak its yield curve control (YCC) framework. However, in line with consensus expectations, a hot June core consumer price inflation print exerted some pressure on the BoJ to tighten policy and raise its inflation forecasts.
Against this backdrop, the 10-year Japanese government bond yield rose slightly to 0.48% from 0.47% at the end of the previous week. The yen weakened to around JPY 141.82 against the U.S. dollar, from about JPY 138.76 the prior week.
Chinese equities retreated as the latest economic data pointed to faltering growth. The Shanghai Stock Exchange Composite Index tumbled 2.16% in local currency terms, while the blue-chip CSI 300 declined 1.98%. In Hong Kong, the benchmark Hang Seng Index fell 1.74%.
On a year-over-year basis, China’s gross domestic product expanded 6.3% in the second quarter—below expectations but faster than the 4.5% growth rate recorded in the first quarter. On a quarterly basis, the economy grew 0.8%, down from the first quarter’s 2.2% expansion.
The Week Ahead:
Next week is a relatively quiet one for UK numbers but we will see interest rate decisions in the US and Europe. We’ll also get a look at early French inflation numbers and GDP. The latter is expected to eke out a very small increase of 0.1%.
On Tuesday Federal Reserve officials will gather for a two-day policy meeting, with an interest rate decision being released on Wednesday.
Earnings season also enters one of its busiest weeks with big tech companies Microsoft, Meta Platforms, and Google parent Alphabet set to report, along with Visa, Mastercard, Texas Instruments, Coca-Cola Company, McDonald’s, Boeing, AT&T, Verizon, Ford Motor Company, Chevron, and ExxonMobil, among others.
The advance estimate for second-quarter US gross domestic product (GDP) will be released on Thursday, followed by the Personal Consumption Expenditures, the Fed’s preferred inflation gauge, on Friday. We’ll also get the latest updates on home prices, along with new and pending home sales for June.
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