Week #27 — Market Update for July 1-5, 2024

Executive Summary

U.S. Stock Market: The U.S. stock market showed superficial growth, led by the Magnificent 7 companies, which accounted for almost all weekly gains of the S&P 500, masking a broader decline in all segments except Large Growth. The Mag7 posted a strong market cap increase of 5.6%, with Tesla marking the most significant movement. Tesla shares surged by 27% week-over-week, driven by higher-than-expected sales figures (actual figure was 443,956 versus 439,302 average Wall Street estimate), erasing its 2024 losses. However, it is difficult to justify such a surge solely by slightly beating estimates. Nvidia's gains were constrained by a rare stock downgrade to neutral by New Street Research. According to analyst Pierre Ferragu, NVDA has reached a point where further significant gains are unlikely, and the stock is now "getting fully valued."

Cryptocurrencies: Despite positive stock market dynamics, Bitcoin declined from Tuesday to Friday, struggling to maintain investor confidence amidst a series of adverse developments. The substantial liquidation of over $800 million in bullish positions added to the bearish sentiment, compounded by miners facing increased financial pressure post-halving. The return of Bitcoin to creditors from the failed Mt. Gox exchange threatens to flood the market with additional supply, further weighing on prices. With weekend liquidity typically lower, any additional sell-offs could have amplified impacts. The $51,000-$52,000 range is seen as a critical support level for Bitcoin, as prices nearing this range put additional pressure on miners who are already close to their break-even points.

Global Stock Markets: Globally, stock markets moved in tandem with the U.S., with the global ex-US index gaining more than 2%. This dynamic is explained by a 1% U.S. dollar depreciation and positive sentiment, most notably in France, where the country ETF jumped by almost 4%. This increase was driven by calming investor sentiments following the latest polls, showing that the far-right National Rally party is set to fall well short of an absolute majority in the upcoming elections on Sunday.

Economic Data: The global economy demonstrated solid growth at the end of the second quarter, with output and new business rates near yearly highs and job growth at its fastest since June 2023. The J.P. Morgan Global Composite PMI Output Index posted 52.9 in June, down from 53.7 in May, indicating continued expansion for the eighth month. Economic activity rose in five of six surveyed sub-sectors, with financial services seeing the fastest growth, followed by solid expansions in business services, consumer goods, and intermediate goods. However, consumer services grew mildly, and investment goods producers saw slight contraction. Growth was observed in 11 of the 14 nations surveyed, with accelerated rates in the U.S., India, and Brazil, while the eurozone and China experienced weaker expansions, and Japan, France, and Russia registered contractions. Bennett Parrish, Global Economist at J.P. Morgan, highlighted that while the PMI slightly declined, it still indicated solid GDP expansion. However, declines in new orders and future output PMIs could signal potential growth moderation, despite resilient employment fundamentals.

Earnings Season: As the earnings season approaches, an overall increase of 10.1% year-on-year is projected for the earnings of S&P 500 Index companies for Q2 2024, according to Refinitiv. Excluding the Energy sector, profits are predicted to see a 10.0% year-over-year increase.

Monetary Policy: Market expectations for the Federal Reserve's actions have evolved following a set of statistics indicating a slowdown in the U.S. economy. The likelihood of a rate cut in September has increased to 83.8% from 70.3% a week ago. Consequently, traders have revised their projections for 2024's monetary easing to 40 basis points, up from 34, implying one certain rate cut in September or November and about a 60% probability of a subsequent cut in December.

Bond Market: The U.S. Treasury yield curve moved down, with 10-year bond yields decreasing by 8 basis points to 4.28% and 30-year bond yields decreasing by 4 basis points to 4.47%.

For comprehensive insights and a deeper understanding of these developments, readers are encouraged to refer to the full article.

US Stock Market

The US stock market has shown a superficial growth, led by the Magnificent 7 companies, which account for almost all weekly gains of the S&P 500, masking a broader decline in all segments but Large Growth. Although the Mag7 posted a strong increase of 5.6% in market cap, the most significant movement was marked by Tesla, driven by higher-than-expected sales figures. However, it is difficult to justify a surge of 27% week-over-week solely by slightly beating estimates (actual figure was 443,956 versus 439,302 average Wall Street estimate), but it did finally erase its 2024 losses.

Meanwhile, Nvidia gains were constrained by a rare stock downgrade (only to neutral!) by New Street Research. According to analyst Pierre Ferragu, NVDA has reached a point where further significant gains are unlikely, and the stock is now "getting fully valued."

Despite positive stock market dynamics, Bitcoin has been declining from Tuesday to Friday, struggling to maintain investor confidence amidst a series of adverse developments. The substantial liquidation of over $800 million in bullish positions has only added to the bearish sentiment, compounded by the ongoing liquidation of Bitcoin by miners facing increased financial pressure post-halving. The return of Bitcoin to creditors from the failed Mt. Gox exchange threatens to flood the market with additional supply, further weighing on prices. With weekend liquidity typically lower, any additional sell-offs could have amplified impacts. The $51,000-$52,000 range is seen as a critical support level for Bitcoin, as prices nearing this range put additional pressure on miners who are already close to their break-even points.

In terms of sector performance, six out of eleven sectors showed positive dynamics.

The Fear & Greed Index, which measures market sentiment, rose to 54 from 44 a week ago, entering the “neutral” zone.

The SPY ETF, which tracks the S&P 500 Index, for the 34th time has posted record close this year, trying to dismiss early signs of potential weakness.

As the earnings season approaches, according to Refinitiv, an overall increase of 10.1% year-on-year is projected for the earnings of S&P 500 Index companies for Q2 2024. Excluding the Energy sector, profits are predicted to see a 10.0% year-over-year increase.

During the week of July 8, eight companies from the S&P 500 index are scheduled to present their financial results, including several large financial companies on Friday. Among all stocks, the most eagerly awaited earnings reports include:

Global Markets

Global stock markets moved in tandem with the US, with the global ex-US index gaining more than 2%. This dynamic is explained by a 1% US dollar depreciation and positive sentiment, most notably in France, where the country ETF jumped by almost 4%. This increase was driven by calming investor sentiments following the latest polls, which showed that the far-right National Rally party is set to fall well short of an absolute majority in the upcoming elections on Sunday.

The ACWX ETF, representing the MSCI All Country World Index excluding the USA, has returned to its May-early June range.

Economic Indicators, Statistics and News

Several important macroeconomic indicators and economic news were published during the week:

Global

·????? Rising debt in the US and other advanced economies was underscored by credit-assessment companies S&P Global Ratings and Scope Ratings, with S&P highlighting that only severe market pressure could change the debt trajectory. In their reports, they indicated that it is unlikely for the US, Italy, and France to stabilize their debt at current high levels. This week’s elections in the UK and France, alongside US political pressures, have intensified focus on their borrowing. The Bank for International Settlements (BIS) also warned of the vulnerability of governments to sudden loss of confidence.

The US, being the largest global economy, remains a major concern. The International Monetary Fund (IMF) recently criticized US borrowing levels, and Federal Reserve Chair Jerome Powell acknowledged the unsustainable debt path. Frequent Congressional debt ceiling debates further complicate fiscal repairs. S&P pointed out the lack of bipartisan support for proactive fiscal measures in the US, affecting its creditworthiness.

France’s fiscal outlook has become more uncertain, especially with its snap election prompting higher premiums on its debt. Rising debt levels could increase investor unease, potentially widening bond spreads over German equivalents. Scope Ratings stressed the need for the new French government to maintain cooperative EU relations and pursue fiscal consolidation to avoid further spread widening.

·????? The J.P.Morgan Global Manufacturing PMI for June was 50.9, slightly lower than May's 51.0. This index has stayed above 50.0, indicating better operating conditions, for five months in a row. Manufacturing production increased for the sixth month, driven by consumer and intermediate goods, though investment goods production fell for the second time in three months. Among the 30 countries surveyed, 18 reported increased output, especially in Asia, with significant growth in India, Vietnam, and Thailand. However, the euro area saw its fifteenth consecutive month of declining output.

The global economy maintained solid growth at the end of the second quarter, with output and new business rates near the highs of the past year, and job growth reaching its fastest pace since June 2023. The J.P. Morgan Global Composite PMI Output Index, produced in collaboration with S&P Global, ISM, and IFPSM, posted 52.9 in June, down from 53.7 in May, indicating continued expansion for the eighth consecutive month. Economic activity increased in five out of six surveyed sub-sectors, with the fastest growth in financial services and solid expansions in business services, consumer goods, and intermediate goods. However, consumer services grew mildly, and investment goods producers saw a slight contraction for the second time in three months.

Growth was observed in 11 of the 14 nations surveyed, including the US, China, Germany, India, the UK, Italy, Spain, Brazil, Ireland, Australia, and Kazakhstan, with accelerated rates in the US, India, and Brazil. Conversely, the eurozone and China experienced weaker expansions, Japan fell back into contraction, and France and Russia also registered contractions.

Bennett Parrish, Global Economist at J.P. Morgan, noted that while the global all-industry output PMI slightly declined to 52.9 in June, it still indicated a solid pace of global GDP expansion. However, declines in new orders and future output PMIs could signal potential moderation in growth, despite the resilient fundamentals suggested by the increase in the employment PMI.

US

·????? President Joe Biden reaffirmed his commitment to the presidential race during a visit to Wisconsin, addressing skepticism about his age and fitness for office. During a campaign stop in Madison, Biden, 81, declared his intention to stay in the race and vowed to defeat Donald Trump. Biden emphasized his role in creating over 15 million jobs and his ongoing efforts to push for abortion rights and gun control laws. The event marked the beginning of a crucial period for Biden, with a key interview on ABC News providing voters and allies an unscripted view of the president.

Biden dismissed reports of Democratic Senator Mark Warner's efforts to convince him to step aside and highlighted that many lawmakers had encouraged him to continue his campaign. Biden's speech, despite a few missteps, aimed to demonstrate his humor and vigor without a teleprompter. He joked about his age, mocking Trump's past misstatements, and expressed determination to continue his work despite challenges.

The president's campaign is focused on restoring confidence among voters, donors, and party officials. Despite excuses for a recent debate performance, concerns about Biden's ability to lead for another four years persist. Top Democratic donors have indicated they might withhold support unless Biden steps aside, and discussions among lawmakers about a potential change in the ticket continue.

Biden also faces the task of shoring up international support ahead of the 75th NATO anniversary summit in Washington, where concerns about his age have been noted by foreign diplomats. Meanwhile, Trump is gaining momentum, with planned rallies and a potential running mate announcement. A recent Wall Street Journal poll showed Trump leading Biden 48% to 42%, with a significant portion of Americans believing Biden is too old for a second term.

In response, Biden's campaign has announced a $50 million media blitz for July, targeting high-profile events like the Olympics and the Republican convention. Biden also plans to engage with Black and Latino voters through appearances at the NAACP and UnidosUS conferences in Las Vegas, while Vice President Kamala Harris will attend the Essence Festival and other significant events. The campaign aims to increase Biden's unscripted public interactions to address concerns about his ability to handle such moments effectively.

·????? The US manufacturing sector remained in growth territory at the end of the second quarter, with the S&P Global US Manufacturing PMI rising to 51.6 in June from 51.3 in May. This indicates a modest monthly improvement in business conditions. New orders increased for the second consecutive month, although the rate of growth was slight due to high prices and challenging economic conditions. Production continued to rise, but at a slower pace than in May, and business confidence hit a 19-month low.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that US manufacturers struggled to achieve strong production growth in June, hindered by weak demand from domestic and export markets. Despite the PMI being in positive territory for five of the first six months of 2024, growth momentum remained weak due to a shift in demand from goods to services post-pandemic, higher prices, and concerns over prolonged high interest rates. These challenges, coupled with uncertainty about the economic outlook as the presidential election approaches, led to the lowest business confidence in 19 months, suggesting further difficulties ahead for the manufacturing sector.

In contrast, the Institute for Supply Management (ISM) reported that US factory activity contracted for the third straight month in June, with its manufacturing gauge at 48.5, indicating contraction. The ISM's measure of prices paid for materials fell by the most in over a year, reaching 52.1, the slowest growth in costs this year. While the new orders gauge improved to 49.3, indicating bookings are nearing stabilization, the production index fell into contraction territory at 48.5, and factory employment shrank.

The ISM data reflected ongoing challenges in the manufacturing sector, including high borrowing costs, restrained business investment in equipment, and uneven consumer spending. Specific industries such as textile mills, machinery, and fabricated metals reported contracting activity, while others like chemical products and electrical equipment indicated growth.

Despite these mixed signals, the overall trend suggests that US manufacturers are facing a tough environment with weak demand from both domestic and export markets, high input costs, and persistent supply-chain issues. The upcoming presidential election and concerns about higher-for-longer interest rates are also contributing to business uncertainty and muted confidence in the manufacturing sector's near-term outlook.

·????? In June, the US service sector saw improved growth momentum, with a notable increase in business activity and new orders. The seasonally adjusted S&P Global US Services PMI Business Activity Index rose to 55.3 from 54.8 in May, marking the highest expansion since April 2022 and indicating a 17-month sequence of growth. The rise in new business was solid, and workforce numbers increased for the first time in three months, although backlogs of work still built up. Input costs and output prices remained elevated due to higher labor costs, despite easing rates of increase.

Chris Williamson commented that the US service sector ended the second quarter on a strong note, with output rising at the fastest rate in over two years. New order inflows and hiring also accelerated, suggesting a GDP rise at an annualized 2.0% rate in the second quarter, with a 2.5% rate for June. Despite some nervousness about the post-election business environment, confidence about the outlook remained elevated, encouraging businesses to invest in expansion. The survey's signs of cooling price pressures, particularly in the services sector, indicated that inflation might trend lower in the coming months, potentially leading to rate cuts.

Once again, the ISM reported a contrasting scenario with its composite gauge of services slumping to 48.8, indicating contraction for the first time since the end of 2022. The business activity index dropped sharply, and new orders shrank, suggesting a moderation in growth. This was accompanied by declines in inventories and employment, which shrank for the fifth consecutive month. Despite the differences between the ISM and S&P Global indices, both reports reflect the ongoing challenges in the service sector, including high borrowing costs, inflation concerns, and uneven consumer spending.

S&P Global highlighted that businesses are optimistic about future growth, with confidence picking up to a five-month high, supported by recent new order increases and hopes for interest rate cuts. On the other hand, ISM noted that some service industries, like real estate, mining, and retail trade, reported contractions, while others, such as accommodation and food services, cited soft sales and inflation concerns.

·????? In June, the US labor market exhibited mixed signals, reflecting both resilience and signs of cooling. Job openings unexpectedly rose to 8.14 million, interrupting a downward trend, with the hiring and layoffs increasing, suggesting market churn. The ratio of job openings to unemployed workers held steady at 1.2, indicating a return to pre-pandemic levels.

Concurrently, the ADP report showed a moderate increase in private payrolls by 150,000, primarily driven by gains in leisure and hospitality, while wage growth for job switchers slowed to 7.7% and for those staying in jobs to 4.9%. Continuing claims for unemployment benefits rose to 1.86 million, the highest since November 2021, hinting at challenges in finding new employment.

Nonfarm payrolls increased by 206,000, though job growth in prior months was revised down by 111,000. The unemployment rate edged up to 4.1%, with a participation rate of 62.6%, the highest for prime-age workers in 22 years. Average hourly earnings grew by 3.9%, the smallest annual increase in three years, reflecting a cooling in wage growth. Despite these mixed indicators, the labor market remains healthier than pre-pandemic levels, though the data suggest a potential easing by the Federal Reserve in the coming months.

·????? The New York Fed Staff Nowcast model downgraded its U.S. GDP growth forecast for Q2 2024 to 1.79% from 1.93% a week ago, as a positive surprise from nonfarm payroll employment data was offset by negative surprises from unemployment and ISM manufacturing survey data, as well as a negative impact from data revisions. Similarly, the Atlanta Fed's GDPNow revised its estimate downward to 1.5% from 2.2%.

Europe

·????? The National Rally and its allies are expected to win between 170 and 250 of the 577 seats in the National Assembly, significantly below the 289 needed to pass bills easily. Although Marine Le Pen, confident in her party's chances, noted that her party had previously won more than twice the projected number of seats. She cautioned that without an absolute majority, no bill would be passed, potentially leading to a standstill until President Emmanuel Macron can legally dissolve parliament again in a year.

The left-wing New Popular Front alliance is projected to win 140 to 198 seats, while Macron's group is on track for between 115 and 162 seats. The prospect of the far-right taking control has forced several parties to unite against the National Rally. Investors are betting on a probable outcome of a technical or coalition government, bringing stability to the markets. Despite market calm, there have been tensions, with over 50 attacks on politicians and activists leading to 30 arrests. The National Rally and its allies won 39 races outright in the first round, securing 33.2% of the total vote. Macron's centrist alliance and the New Popular Front strategically withdrew over 200 candidates to avoid splitting the opposition to the far-right.

Scope Ratings reported that either a hung parliament or a National Rally victory would hinder efforts to fix France's public finances and could have wider European implications. France's plan to reduce its budget deficit below the EU's 3% threshold by 2027 is considered outdated, and either outcome would add pressure to the country's sovereign credit rating. The political polarization and stretched public finances limit France's policy maneuverability, potentially affecting EU-level initiatives and testing the credibility of the EU's fiscal framework. Scope Ratings has a negative outlook on France, rating it AA, one level higher than S&P Global Ratings, which downgraded France in May.

Campaign promises from the parties vary significantly in cost. The left-wing New Popular Front's pledges would require nearly €95 billion per year, largely due to its plan to cut the retirement age. The National Rally's plans are estimated at €48 billion, while Macron's party and its allies would incur around €15 billion in extra spending over time. The estimates focus on tax and retirement proposals and do not include every part of each party's platforms. France's strained public finances make a sharp increase in spending challenging, as the country is under an EU procedure for excessive deficits, potentially limiting ambitious spending plans.

·????? In June, euro-zone inflation slowed to an annual rate of 2.5%, down slightly from 2.6% in May, aligning with economist expectations. Excluding volatile items like food and energy, core inflation remained steady at 2.9%, unexpectedly showing no change. The European Central Bank (ECB) anticipates inflation will stay relatively stable for the rest of 2024 due to base effects, with significant movement toward the 2% target expected next year and achievement of the goal by the end of 2025. Bloomberg Economics' Nowcast for July suggests a further slowdown to 2.3%, accurately predicting June’s inflation data.

·????? The eurozone's manufacturing sector exhibited significant signs of weakness at the end of the second quarter, as indicated by the HCOB Eurozone Manufacturing PMI which fell to 45.8 in June, down from May’s 47.3. This decline marks the fourth drop in five months and signifies a solid and accelerated deterioration in the sector. The contraction in output reached the highest rate seen so far in 2024, driven by a sharper decrease in demand conditions, with new orders and export orders continuing to fall. Purchasing activity and employment also declined at faster rates, although the 12-month outlook for output remained positive. Input costs for eurozone factories increased for the first time in 16 months, prompting only marginal reductions in output charges.

At the national level, Greece maintained the highest PMI at 54.0 despite a six-month low, while Germany continued to perform the worst, with its manufacturing PMI at 43.5. Other countries such as Spain and the Netherlands showed slower improvement rates, and France, Austria, and Italy all experienced worsened conditions. The overall business confidence remained unchanged from May's 27-month high, suggesting optimism towards future production.

The broader eurozone economy saw a slowdown in growth, with the HCOB Eurozone Composite PMI Output Index falling to 50.9 in June from 52.2 in May, indicating the slowest expansion in three months. This decline was due to a reduction in new orders for the first time since February, with weaker sales especially pronounced in non-domestic markets. Despite this, input costs and output prices cooled to five- and eight-month lows respectively, although they remained above pre-pandemic levels.

In June, most eurozone nations with composite PMI data recorded growth, but at a slower pace. Spain remained the fastest-growing economy, while Germany, Ireland, and Italy showed more muted expansions. France, however, saw a decline in private sector business activity for the second consecutive month. New business from international clients contracted more sharply than total new orders, indicating stronger external demand drag.

·????? In June, German factory orders fell by 1.6% from April, contrary to analyst expectations of a 0.5% increase. This marks the fifth consecutive month of decline, with orders down 8.6% year-on-year. The decrease was mitigated slightly by above-average bulk orders but was significantly impacted by a drop in demand outside the euro zone. The Economy Ministry highlighted that the continued decline in orders, coupled with worsening business expectations in the manufacturing sector, suggests subdued industrial momentum in the upcoming months.

German industrial production also saw a significant decline, falling 2.5% in May compared to the previous month. This unexpected drop was reflected across key sectors such as cars, machinery, and electrical equipment, all experiencing decreases of over 5%.

Germany's manufacturing sector faced another setback at the end of the second quarter. The HCOB Germany Manufacturing PMI dropped to 43.5 in June from May's 45.4, indicating a sharper contraction in output and new orders. Both domestic and international demands weakened, with export orders from Europe and Asia particularly affected. Despite the downturn, business confidence improved slightly, driven by hopes of future export growth and economic recovery. Input prices rose at the fastest rate in 14 months due to increased costs of copper, crude oil, and other inputs, leading manufacturers to raise their selling prices at the highest rate in over a year.

In contrast, the German service sector experienced a solid rise in business activity in June, although the rate of expansion slowed compared to previous months. The HCOB Germany Services PMI registered at 53.1, down from May's 54.2. Despite this, new business inflows remained steady, supported by factors such as increased marketing efforts and the European Football Championships. Employment in the service sector continued to grow, albeit at a slower pace, reflecting ongoing optimism about future business activity. Input cost inflation in services rose at the slowest rate since March 2021, yet remained historically high due to wage pressures. Output prices also saw a slight increase from May's recent low.

·????? The Labour Party has secured a landslide victory in the UK election, marking a dramatic shift in the political landscape after 14 years of Conservative rule marred by turmoil. Keir Starmer's Labour Party won 412 of the 650 seats in the House of Commons, the most since Tony Blair's 1997 triumph. The Conservative Party, on the other hand, experienced its worst performance ever, securing only 121 seats. Starmer, 61, took over as prime minister after meeting King Charles III at Buckingham Palace, replacing Rishi Sunak, who apologized for the result and announced his resignation as Conservative leader.

This victory, however, presents significant challenges for the new government. Labour's win was based on just 34% of the popular vote, with the populist Reform UK party, led by Nigel Farage, taking a substantial portion of the right-wing Conservative vote, despite securing only four seats. This victory suggests a rejection of the Conservatives but also indicates lingering discontent with the traditional two-party system in British politics.

Labour's strategy under Starmer focused on economic stability and positioning the party as a centrist alternative, which involved expelling former leader Jeremy Corbyn and emphasizing business-friendly policies. Rachel Reeves, a former Bank of England economist and the UK's first female Chancellor of the Exchequer, played a crucial role in this strategy.

The political shift in the UK contrasts with ongoing challenges in other countries. For instance, France is grappling with the rise of the far-right National Rally, and in the US, Democrats are debating the best candidate to challenge Donald Trump. Starmer's approach includes prioritizing economic growth and addressing critical issues such as crumbling public services, weak private investment, and budget constraints.

Starmer's immediate agenda includes taking a leading role in international affairs, particularly in defense, security, and climate change. He plans to strengthen ties with the European Union and improve the UK's Brexit deal. The Labour government aims to boost private sector investment, which has lagged behind other advanced economies, and address issues such as homelessness, housing, and renewable energy infrastructure.

The election result has had a positive impact on financial markets. UK stocks rose , with the FTSE 100 Index gaining 0.4%, and the pound experienced its longest winning streak in four years. Investors are optimistic about the stability and moderation promised by Starmer's administration, which contrasts with the recent political turmoil in other developed economies.

Labour's comprehensive legislative agenda includes a variety of reforms, such as improving workers' rights, ending "no fault evictions," creating a publicly-owned energy company, and increasing neighborhood policing. The government also plans to address local government bankruptcies, rising immigration, and stretched university finances.

Despite the challenges, Starmer's administration has a unique opportunity to reset British politics and restore trust in government. With a strong mandate and a clear focus on economic growth and stability, Labour aims to navigate the complexities of the current political and economic landscape to deliver tangible improvements for the British people.

·????? The UK manufacturing sector continued to show positive growth at the end of the second quarter, with both output and new orders expanding for the second consecutive month in June. The S&P Global UK Manufacturing PMI registered 50.9, slightly down from May's 51.2 but still above the neutral 50.0 mark, indicating expansion. Production volumes increased as companies responded to rising new orders and efforts to clear backlogs. This growth was seen across consumer, intermediate, and investment goods categories, although it was confined to large-scale producers, with small and medium-sized enterprises experiencing contractions in output and demand.

New business intakes rose for the third time in four months, driven primarily by the domestic market, while new work from overseas continued to decline. Reports of lower intakes from key international markets such as North America, China, and several European countries were linked to shipping delays and rising freight costs. Despite challenges, manufacturers remained optimistic, with 57% expecting output to rise over the coming year. However, there was a strong focus on cost minimization and cash flow protection, leading to job losses and reductions in non-essential purchasing. Input prices rose for the sixth consecutive month, driven by higher costs for a range of materials and services, leading to increased selling prices.

In the UK service sector, business activity continued to grow for the eighth consecutive month in June, although the rate of growth was the slowest since November of the previous year. The S&P Global UK Services PMI registered 52.1, down from 52.9 in May. The upcoming general election influenced client behavior, leading to a "wait-and-see" approach that dampened new business growth. While there was a slight increase in sales from non-domestic customers, the overall rate of new business growth was modest and the weakest in seven months.

Employment growth in the service sector slowed, with firms making redundancies and not replacing voluntary leavers to cut costs. Operating expenses continued to rise sharply, primarily due to higher wage bills, shipping costs, and raw material prices. Despite this, the rate of input cost inflation was the slowest since February 2021. Prices charged by service providers increased at a slightly stronger rate, driven by some companies' ability to raise fees due to strong pricing power.

·????? UK house prices experienced slight increases in June, indicating a stabilizing market after a dip last year. Nationwide Building Society reported a 0.2% rise in prices, following a 0.4% gain in May. Prices are now 1.5% higher than a year ago, despite high interest rates affecting mortgage affordability. Nationwide noted a rise in cash buyers. Economist Robert Gardner highlighted that earnings growth hasn't offset the impact of higher mortgage rates, making housing affordability still challenging. Bloomberg Economics suggests that the housing market is showing resilience, with activity expected to increase after the general election and anticipated interest rate cuts by the Bank of England.

Meanwhile, the UK housebuilding industry saw a pause in recovery in June due to delays in projects ahead of the general election. The UK construction purchasing manager index fell to 52.2 in June from 54.7 in May, lower than the expected 54 but still indicating growth. Construction firms reported the weakest rise in new orders since February, attributing it to election uncertainty. Housebuilding was the weakest segment, while civil engineering and commercial development activities grew at a slower pace. Confidence in the year ahead remained strong, with hiring increasing at the fastest pace since August 2023. The new government will face a sluggish economy affected by higher borrowing costs and a stagnant housing market.

Asia

·????? Japan's government statisticians revised the country's growth figures, revealing that the economy shrank more than previously reported at the start of the year. The updated data shows a contraction of 2.9% annualized in the first quarter, compared to the earlier estimate of 1.8%. This revision, the second in three weeks, casts doubt on the reliability of Japan’s preliminary growth figures and may lead to a downward revision of the central bank’s annual growth forecast. The latest figures reflect changes in construction data and show a 1.9% drop in public investment.

Following this revision, economists from BNP Paribas and SMBC Nikko Securities have adjusted their forecasts to predict an economic contraction in 2024, marking Japan’s first annual contraction since 2020. These revised forecasts come ahead of the Bank of Japan’s (BOJ) policy meeting at the end of July, with one-third of surveyed economists expecting a rate hike. The revised GDP figures suggest the central bank might lower its growth projection for the fiscal year to around 0.5% from 0.8%.

Confidence among Japan’s large manufacturers rose in June, as indicated by the BOJ’s Tankan report, which showed an increase in the sentiment index from 11 to 13. This rise in confidence leaves room for the BOJ to consider an interest rate hike later this month. The Tankan report also revealed a slight decline in sentiment among large non-manufacturers and an increase in capital spending plans to 11.1% growth. Despite a weaker yen, which hit a 38-year low, inflation expectations remain high, supporting the case for another rate hike.

Household spending in Japan unexpectedly fell by 1.8% in May from a year earlier, contrary to expectations of a 0.3% increase. This decline raises doubts about the strength of private consumption as a driver of economic growth in the second quarter. Spending on food, utilities, and household durable goods contributed to the decline, while outlays for education and cars increased. The ongoing inflation, which has remained above the BOJ’s 2% target for over two years, continues to weigh on consumer sentiment and real wages.

·????? Japanese manufacturing showed a slight improvement at the end of the second quarter, supported by job creation, clearing backlogs, and stock-building efforts. However, demand remained weak, with ongoing declines in new orders and international sales. The au Jibun Bank Japan Manufacturing PMI stood at 50.0 in June, indicating no overall change from May. Factory output increased marginally for the first time in over a year, driven by clearing outstanding business and stock-building. New orders continued to fall for the thirteenth consecutive month, and export orders decreased for the twenty-eighth month, primarily due to weaker demand from Asia, Europe, and North America. Despite the weak demand, business sentiment improved to a six-month high, underpinned by expectations of recovery in key sectors. Employment rose for the fourth consecutive month. Input prices increased sharply due to higher costs of materials and labor, leading to the highest inflation rate in 14 months, and selling prices rose to the greatest extent in over a year.

In contrast, Japan's service sector stalled in June, with the Services PMI dropping to 49.4 from 53.8 in May, indicating a slight decline in activity for the first time since August 2022. This ended a 21-month period of continuous expansion. The decline was driven by stagnant new business growth, with domestic demand contracting while international sales continued to rise, although at a slower rate than in May. Outstanding business also contracted at the fastest pace in over two years. Despite this, service providers continued to add workers, marking the ninth consecutive month of job creation, reflecting optimism about future business activity. However, the degree of optimism eased to an eight-month low. Input price inflation accelerated to a ten-month high, but the rate of increase in prices charged for services was the weakest since November 2023, indicating rising pressure on profitability.

·????? China’s factory activity contracted for the second consecutive month in June, with the official manufacturing PMI remaining at 49.5, unchanged from May. The sub-index of new orders dropped slightly to 49.5, and new export orders stayed at 48.3, indicating weakening demand. The non-manufacturing measure, covering construction and services, also fell to 50.5 from 51.1 in May, showing a slowdown in these sectors. This persistent contraction in the manufacturing sector poses a threat to China’s economic growth target of around 5% for the year. Trade tensions with the US and EU, along with a decline in state infrastructure spending, further complicate the economic outlook, suggesting that more robust fiscal measures may be needed to support the economy.

In contrast, a private gauge of factory activity, the Caixin manufacturing PMI, rose to 51.8 in June, the highest reading since May 2021, exceeding economists' forecasts of 51.5. However, this positive result was overshadowed by declining confidence among manufacturers regarding future output, which fell to the lowest level since late 2019. Strong exports have supported production, but domestic demand remains weak, and the outlook for exports is uncertain due to rising trade barriers from key partners. Additionally, falling prices for goods are pressuring revenues and profits, suggesting that the Caixin PMI might weaken in the coming months. The disparity between the official and private surveys highlights ongoing challenges in the Chinese economy, with weak demand impacting production and increasing the risk that GDP growth will miss the official 5% target for 2024.

The services sector also showed signs of slowing down, with the Caixin services PMI falling to 51.2 in June from 54 in May, marking the slowest pace of growth in eight months. This slowdown adds to concerns about the Chinese economy, as the housing market continues to contract despite government efforts to support it, and deflationary pressures persist. Confidence among service providers fell to the lowest level since March 2020, with firms cautious about hiring additional staff due to rising competition and expectations of softer economic conditions. The Caixin reading, which focuses on smaller firms, was still stronger than the official data but indicated a weakening growth momentum that may further impact the economic outlook.

·????? In June, India's manufacturing sector showed significant recovery, with the headline PMI rising to 58.3 from 57.5 in May, indicating a sharper improvement in business conditions. This increase was supported by strong demand, resulting in substantial expansions in new orders, output, and purchasing activities. Employment also grew at the fastest rate in over 19 years, driven by buoyant underlying demand and successful advertising efforts. Despite easing cost pressures, input price inflation remained high, leading companies to raise selling prices to the greatest extent since May 2022. The sector saw robust export growth, particularly from regions like Asia, Australia, Brazil, Canada, Europe, and the US. The outlook for the manufacturing sector remained positive, with firms expecting further demand and order book volume improvements, although confidence dipped to a three-month low.

India's service sector also experienced sustained growth in June, with the Business Activity Index rising to 60.5 from 60.2 in May, marking a sharp expansion in output. This growth was fueled by a stronger rise in new orders and an unprecedented increase in international sales, with significant contributions from regions such as Asia, Australia, Europe, Latin America, the Middle East, and the US. Service providers increased staffing levels at the fastest pace since August 2022 to support the influx of new business. Input costs for services rose moderately, influenced by higher food, fuel, and labor expenses, but selling price inflation was the weakest since February. Despite the overall positive outlook, the level of optimism among service providers fell to an 11-month low due to market uncertainties and competition concerns.

Foreign Exchange Markets

The Dollar Index, which reflects the value of the US dollar against a basket of major currencies, lost 0.9% over the week as political developments in the UK and France supported gains for the pound and the euro against the greenback.

Commodities and Energy Markets

In the commodities sector, the majority of assets ended the week with positive movements.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (until December 2025) has shifted downward by an average of 9 basis points following a set of statistics indicating a slowdown in the US economy.

Meanwhile, the U.S. Treasury yield curve moved down, with 10-year bond yields decreasing by 8 basis points to 4.28% and 30-year bond yields decreasing by 4 basis points to 4.47%.

Central Bank Insights

·????? European Central Bank (ECB) officials decided to cut interest rates in June despite concerns about long-term inflation, citing the need to act promptly rather than wait for complete data, which could delay necessary actions. The ECB started reducing record-high borrowing costs as inflation nears the 2% target, with expectations of one or two more cuts by year-end. However, uncertainty remains over future inflation, particularly concerning energy, food prices, and wage dynamics.

ECB President Christine Lagarde and Chief Economist Philip Lane emphasized the need for patience and data-dependence, suggesting that more time is required to assess inflation risks fully. They noted that the robust euro-zone job market provides some leeway to gather more information. The ECB aims to ensure that inflation risks have passed before making further rate cuts. Services inflation, driven by wage increases, remains a particular concern, with recent data showing services inflation at 4.1%.

Governing Council members expressed varying views on the path ahead. Gediminas Simkus, Martins Kazaks, and Pierre Wunsch consider one or two more cuts this year reasonable if data evolve as expected. Simkus mentioned that the ECB's policy remains restrictive, with room for maneuvering. Kazaks stressed the importance of not delaying the achievement of the 2% inflation target, while Wunsch called for caution and a focus on meetings with updated economic projections.

Madis Muller and Gabriel Makhlouf advocated for a gradual approach to rate cuts, citing high core and services inflation and strong wage growth as reasons to move slowly. Makhlouf is comfortable with one more cut this year but prefers waiting for more data. Yannis Stournaras supported further cuts, emphasizing the need to consider the overall inflation trend rather than over-interpreting services inflation figures.

Mario Centeno highlighted the importance of a gradual and predictable policy path to maintain credibility and avoid confusion. He indicated that it is possible to cut rates at any meeting but stressed the medium-term focus of monetary policy decisions.

In summary, while the ECB is committed to reducing interest rates to support the economy, officials are cautious about moving too quickly without sufficient evidence that inflation is under control. The focus remains on carefully monitoring economic data, particularly services inflation and wage growth, to ensure a sustainable path toward the 2% inflation target.

·????? Federal Reserve officials are awaiting additional evidence that inflation is cooling before deciding on future interest rate adjustments. During their last policy meeting in June, they agreed it was premature to lower borrowing costs until there was greater confidence that inflation is on track to meet the 2% target. The Fed has maintained its key policy rate within a range of 5.25% to 5.5%, the highest level in over two decades. At the meeting, officials reduced the projected number of rate cuts for the year to just one, with some members seeing no cuts necessary for 2024 and others anticipating two cuts. There was a clear division among officials regarding how long to maintain elevated rates, with some emphasizing patience and others warning of potential unemployment increases if demand weakens further.

Chair Jerome Powell emphasized that while recent economic data suggests progress in reducing inflation, more evidence is needed before considering rate reductions. He noted the strong US economy and labor market provide the flexibility to ensure inflation is effectively managed without rushing decisions. Powell highlighted the dual risks of managing inflation and avoiding significant labor market deterioration as central concerns.

Federal Reserve Bank of Chicago President Austan Goolsbee echoed the sentiment that if inflation continues to decline towards the 2% target, rates should be adjusted accordingly. He pointed out that holding rates steady while inflation decreases effectively tightens policy, which should be a deliberate decision rather than a default action. Goolsbee noted recent data indicating improved inflation readings and the need to balance this progress against potential economic and employment weaknesses.

Federal Reserve Bank of New York President John Williams, who has extensively researched the natural rate of interest (r-star), stated that current estimates suggest r-star remains near pre-pandemic levels, dismissing suggestions that it has risen significantly. Williams emphasized the uncertainty in measuring r-star and cautioned against over-reliance on these estimates when setting monetary policy. He reiterated the Fed's commitment to a 2% inflation target while acknowledging the challenges of interpreting the neutral rate amid economic shifts.

Williams also remarked that while inflation has moderated towards the 2% goal, there is still some way to go to achieve this target sustainably. He highlighted the importance of "well-anchored" inflation expectations and discussed the resilience of the US economy, noting that recent positive economic performance has supported market valuations. Williams underlined the continued commitment to managing inflation effectively.

Overall, Federal Reserve officials remain cautious about making premature rate cuts, emphasizing the need for solid evidence of sustained progress towards the 2% inflation target. The divergence in views among policymakers reflects the complexity of balancing inflation control with economic and employment stability. The ongoing discussion about the natural rate of interest further complicates the monetary policy landscape, requiring careful consideration of various economic indicators and potential future scenarios.

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