Global markets weekly update

U.S.

Stocks continue recovery from August 5 sell-off

Stocks recorded a solid week of gains, as investors appeared to celebrate positive news on both the inflation and growth fronts, which together bolstered hopes that the economy might achieve a “soft landing.” The technology-heavy Nasdaq Composite led the gains and ended the week up 12.24% off its intraday lows amid the sell-off on August 5. Artificial intelligence chip giant NVIDIA was especially strong, gaining 18.93% over the week. Relatedly, growth stocks handily outpaced value shares, according to various Russell indexes.

Consumer discretionary stocks also performed well, with Starbucks surging 24.50% on Tuesday on news that it was replacing its CEO with one credited with engineering a turnaround at Chipotle. Likewise, Walmart gained 6.58% on Thursday following its earnings report, which beat consensus expectations. The company also surprised analysts by raising its profit and revenue outlook for the remainder of the year. Shares of Google parent Alphabet fell at midweek, however, following reports that the Justice Department was investigating breaking up the company, which would mark the largest such action since AT&T was dismantled in the 1980s. 

By the end of the week, analysts polled by FactSet were estimating that the overall earnings for the S&P 500 had expanded by 10.9% in the second quarter versus the year before, which would mark the fastest pace since the end of 2021.

Retail sales jump by most in 18 months

Along with Walmart’s guidance, official economic data suggested that the consumer was holding strong in the face of the cooling labor market. On Thursday, the Commerce Department reported that retail sales surged 1.0% in July, their best showing in 18 months. Gains were strongest in the volatile auto sector, but increases were broad-based and included a 0.3% increase in sales at bars and restaurants, a sign of healthy discretionary spending.

The week’s inflation data also seemed to support sentiment. On Tuesday, the Labor Department reported that core (excluding food and energy) prices paid by producers was flat in July, ending three months of solid increases. Consumer price index (CPI) inflation, reported Wednesday, was more in line with expectations but also seemed to reassure investors. Notably, the year-over-year increase in CPI fell below 3.0% for the first time in well over three years. 

New housing activity retreats to early pandemic levels

News on the housing sector was less encouraging. On Friday, the Commerce Department reported that building permits fell below 1.4 million for the first time since the depths of the pandemic in 2020. Actual housing starts also fell to their lowest level in four years. Similarly, a gauge of builder sentiment released Thursday fell to its lowest level of the year.

The yield on the benchmark 10-year Treasury note decreased through most of the week on the benign inflation data but jumped Thursday morning following the strong retail sales data. (Bond prices and yields move in opposite directions.) Our traders reported that technical conditions were also supportive in the tax-free municipal bond market as primary issuance was lighter than the volumes seen in recent weeks.

Our traders noted that the U.S. investment-grade corporate bond market lagged Treasuries on Monday before benefiting from improving risk sentiment through the rest of the week. Most issues were oversubscribed, and total primary issuance was at the top end of estimates. 

Our traders reported that the high yield bond market trended higher on lighter-than-average volumes as equities and Treasuries rallied following the week’s inflation data. Several high yield deals launched as issuers appeared to take advantage of the positive sentiment ahead of the seasonal slowdown period expected over the following two weeks.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 2.46% higher as hopes grew for another round of interest rate cuts as early as September. Major stock indexes posted strong gains. Germany’s DAX climbed 3.38%, France’s CAC 40 Index advanced 2.48%, and Italy’s FTSE MIB added 4.09%. The UK’s FTSE 100 Index tacked on 1.75%.

UK data offer scope for rate cuts as inflation slows and economy grows 

Headline inflation in the UK ticked up to 2.2% in July from 2.0% in June. However, growth in services prices—a focus for policymakers—slowed more than forecast, prompting financial markets to price in a higher likelihood of interest rate cuts later this year. The economy remained strong in the three months through June. Gross domestic product (GDP) expanded 0.6% sequentially, following a solid rebound in the first quarter after last year’s recession.  

Average weekly earnings growth, excluding bonuses, rose 5.4% in the three months through June, compared with the same period last year—the lowest annual increase in almost two years. Monthly retail sales volumes rebounded 0.5% sequentially in July, after a 0.9% decline in June. 

Eurozone economy maintains resilience

The eurozone economy expanded 0.3% sequentially in the second quarter, the same rate as in the first quarter. GDP growth in France, Italy, and Spain offset an unexpected contraction in Germany. Still, industrial production contracted 0.1% in June, falling short of a consensus estimate for a 0.5% increase. A purchasing managers’ survey suggested that business activity stalled in July as well. Even so, the labor market remains resilient. Eurostat data showed that employment in the second quarter expanded 0.2% sequentially.

Norway holds rates steady

Norges Bank, Norway’s central bank, held its key interest rate at 4.5%, as expected. Governor Ida Wolden Bache reiterated that based on the current assessment of the outlook, the policy rate will likely be kept at the current level for some time. However, the central bank said in a statement that if there was a more pronounced slowdown in the economy than projected in June, the rate could be lowered earlier than previously envisaged.

Japan

Japan’s stock markets rebounded strongly over a holiday-shortened week, with the Nikkei 225 Index gaining 8.7% and the broader TOPIX Index up 7.9%. The yen weakened to the high-JPY 148 range against the U.S. dollar, from around JPY 146.6 the prior week, providing a tailwind for Japan’s exporters. Sentiment was boosted by better-than-expected U.S. economic data, which soothed concerns about a recession in the world’s largest economy. In turn, Japan’s gross domestic product expanded by more than anticipated in the second quarter of the year, lending further support. 

In the fixed income markets, the yield on the 10-year Japanese government bond rose to 0.88%, from 0.86% at the end of the previous week. Speculation continued about the Bank of Japan’s (BoJ’s) future monetary policy trajectory, following recent comments by its deputy governor that the central bank will not raise interest rates when markets are unstable. When the BoJ raised rates in July, it sparked huge volatility that led many market participants to pare their expectations for another hike this year.

Japan’s economy rebounded strongly in the second quarter of the year, expanding 0.8% quarter on quarter, ahead of estimates of 0.5% and reversing the first quarter’s 0.6% contraction. On an annualized basis, the economy expanded 3.1% (versus consensus 2.1% and following a 2.3% contraction). The rebound was driven by a strong uptick in private consumption and a bounce-back in business investment. The impact of factors that weighed on growth over the first three months of the year—the Noto Peninsula earthquake and some suspension of auto production—also lessened.  

On the political front, Japan’s Prime Minister Fumio Kishida reportedly will not seek reelection as leader of the Liberal Democratic Party (LDP) in September, ending his premiership once the party chooses a new leader. The decision follows low approval ratings partly due to his handling of various LDP scandals, including the slush money scandal where party factions had concealed income received through fundraising. Political uncertainty is unlikely to drive asset prices in the near term unless there are large shifts in views on monetary and fiscal policy.

China

Chinese equities rose as investor sentiment was largely unaffected by weaker-than-expected economic activity. The Shanghai Composite Index gained 0.6% while the blue chip CSI 300 added 0.42%. In Hong Kong, the benchmark Hang Seng Index was up 1.99%, according to FactSet.

July data highlighted weakness in China’s economy. Industrial production rose a below-consensus 5.1% in July from a year earlier, slowing from June’s 5.3% increase, partly due to lower auto sales. Retail sales expanded a better-than-expected 2.7% in July from a year earlier, up from a 2% increase in June. Fixed asset investment rose 3.6% in the January to July period from a year ago, lagging forecasts, while property investment fell 10.2% year on year. The urban unemployment rate edged up to 5.2% from 5% the prior month.

New bank loans rose a weaker-than-expected RMB 260 billion in July, down sharply from RMB 2.13 trillion in June, while loan growth in July slowed to 8.7% year on year. July’s weak credit data raised speculation that the central bank may cut interest rates further to fuel demand as China’s prolonged property market slump continues to hit consumer confidence. 

New home prices extend declines 

New home prices in 70 cities fell 0.7% in July, unchanged from the pace of declines in the prior two months and marking the 13th straight monthly drop, according to China’s statistics bureau. While data suggested that the government’s property rescue package introduced in May has spurred demand in major cities, buying interest remained sluggish in smaller towns, according to Bloomberg.

 

Other Key Markets

Brazil’s benchmark Ibovespa index rose for the week amid mounting evidence of a strengthening economy. The Brazil central bank’s IBC-Br index—a gauge of economic activity seen as a key predictor of gross domestic product—rose by surprisingly strong 1.4% in June from May. The month-on-month increase resulted in a 1.1% expansion in the second quarter and led many economists to boost their full-year GDP forecasts for Brazil, where a hot jobs market and resilient services costs have bolstered the economy. However, rising price pressures have also worsened Brazil’s inflation outlook. On Friday, the monetary policy director of Brazil’s central bank said that policymakers would do “whatever it takes” to bring inflation back down to the bank’s 3% target, Bloomberg reported. Traders have fully priced in a rate hike when Brazil’s central bank meets on September 17–18.

Indian stocks recorded a weekly gain. The country’s benchmark NSE Nifty 50 and BSE Sensex indexes each posted its best session in three weeks on Friday, driven by gains in India’s heavyweight information technology companies. India’s inflation rose 3.54% in July from a year ago, the country’s statistics ministry reported Monday, marking the slowest increase in five years. However, the Reserve Bank of India (RBI) previously said that inflation would decline in July due to statistical reasons. The RBI has kept rates unchanged for more than 18 months; however, recent indicators of slowing economic activity have led some economists to think that the central bank could cut rates as soon as October.