Weekly house view | Happy 4th of July

The tech-dominated Nasdaq recorded its best first half in four decades, while robust US growth data and softer inflation numbers meant that the broad S&P 500 also ended the half on a strong note last week. The data included an upward revision in US GDP growth to an annualised 2% in the first quarter from 1.3%, buoyed by consumer spending. US consumer confidence also increased in June, hitting its highest level in over a year. Jobless claims in the week ended 23 June fell by the most in 20 months. The Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred gauge of inflation, fell to an annual 3.8% in May from 4.3% in April and the core PCE edged lower to 4.6% from 4.7%. Nonetheless, we expect the US economy to face a tougher second half as consumer savings are run down and student loan repayments resume after the US Supreme Court blocked President Joe Biden’s plan to cancel USD430 bn in debt. We will be watching Friday’s June non-farm payrolls data, which will influence markets’ direction.

In the euro area, headline inflation slowed to an annual 5.5% in June from 6.1% in May. Core inflation, which excludes energy and food and which European Central Bank policymakers see as a better gauge of the underlying trend, edged back up to 5.4% from 5.3% Central bankers gathering in Sintra, Portugal last week appeared to share the same concerns over inflation being more persistent than expected. The obvious implication is that we will have higher policy rates for (much) longer — especially as we expect core inflation to remain sticky, even if headline inflation continues to head down. The German yield curve was at its most inverted level in 31 years last week, with policy-sensitive 2-yr rates at 80 bp above 10-year rates as investors bet ECB tightening will push the European economy into a deeper downturn.

In China, economic numbers keep disappointing, with profits at industrial firms declining by 18.8% year-on-year in the first five months of 2023. The People’s Bank of China (PBoC) pledged on Friday that it would implement monetary policy in a “precise and forceful manner” to support economic growth and employment. The central bank also said it wanted to avoid currency swings. But support measures for the property sector were absent from the PBoC’s communique and general market disappointment with policy support so far has left Chinese equities behind. Nonetheless, we are keeping our Chinese 2023 GDP growth forecast at 5.5% on expectations that further stimulus will kick in.