Global markets weekly update

U.S.

Rotation benefits small-caps

Stocks moved higher in the first notably broad advance since mid-April. The Dow Jones Industrial Average, S&P 500 Index, and technology-heavy Nasdaq Composite moved to record intraday highs, but the biggest advance was notched by the small-cap Russell 2000 Index, which gained 6.00%, marking its best week since early November. As measured by various Russell indexes, value stocks also handily outperformed growth stocks. T. Rowe Price traders noted that trading volumes were light over much of the week, however, reflecting both the summer vacation season and investors waiting for the arrival of major earnings reports.

The unofficial start of earnings season kicked off Friday, with second-quarter earnings releases from JPMorgan Chase, Wells Fargo, and Citigroup. Shares of all three fell at the open of trading, with JPMorgan and Wells Fargo both missing estimates and the latter cutting its outlook. As of the end of the week, analysts polled by FactSet were expecting growth in overall earnings registered by the S&P 500 to accelerate from 5.9% in the first quarter to 9.3% in the second, which would mark the fastest rate since the first quarter of 2022.  

Consumer prices fall for first time since early 2020

A major factor supporting many stocks—if not the price-weighted benchmarks—appeared to be Thursday’s release of the Labor Department’s consumer price index (CPI). Headline prices fell 0.1% in June, marking the first decline since soon after the start of pandemic lockdowns in May 2020. More encouraging, perhaps, core (less food and energy) prices rose a less-than-expected 0.1%, the slowest pace in over three years. At a roundtable hosted by the Chicago Federal Reserve, Chicago Fed President Austan Goolsbee called the data “profoundly encouraging” and a sign that inflation was on its path back to the Fed’s annual target of 2.0%.

The market’s reaction to the data was notably mixed, however. In the wake of the report, the Russell 2000 Index outperformed the large-cap S&P 500 index by 209 basis points, according to our traders, while besting the Nasdaq Composite by 581 basis points. Moreover, according to Bespoke Investment Group, it was only the second time since 1979 that the Russell 2000 rose by over 3% while the S&P 500 finished in the red, and the first time since October 2008.  

Friday’s producer price index (PPI) data arguably further complicated the inflation narrative and its implications for the market. The headline PPI rose a tick more than expected at 0.2% in June, while May’s decrease was also revised upward to flat. Investors seemed to take satisfaction in the core (less food, energy, and trade services) PPI reading, which came in unchanged for the month. As with the overall economy, input inflation trends remained concentrated in services, particularly machinery and vehicle wholesaling. 

Uruçi: Fed may move more slowly than expected

The inflation data sent shockwaves through the federal funds futures market, which began pricing in the virtual certainty of a rate cut at the Fed’s September meeting. T. Rowe Price Chief U.S. Economist Blerina Uruçi has upped her expectations for future rate cuts modestly, but she thinks that the resilience of the economy will lead the Fed to stay “higher for longer.” This makes current market pricing of more than two cuts (of 25 basis points each) by December 2024 and almost seven cuts by December 2025 aggressive, in her view.

She also notes that inflation remains “sticky” in certain key categories. While food inflation has moderated, for example, it seems to have settled above its pre-pandemic range. Meanwhile, momentum in agricultural prices and the recent uptick in restaurant prices suggest some upside risks.

The yield on the benchmark 10-year Treasury note declined sharply in the wake of the CPI report, briefly touching its lowest level (4.16%) since March 12. (Bond prices and yields move in opposite directions.) Municipal bond yields decreased along with Treasuries, although our traders noted that longer-maturity new issues saw less demand. 

Our traders noted light issuance in the high yield bond market due to the closely watched economic reports and in anticipation of earnings season. Meanwhile, the bank loan market—which typically performs well amid higher rates—maintained its firm tone despite the softer-than-expected CPI report and its implications for Fed rate cuts, largely due to resilient demand.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.45% higher as investors welcomed lower-than-expected U.S. inflation data. Major stock indexes rose as well. France’s CAC 40 Index added 0.63%, Italy’s FTSE MIB put on 1.74%, and Germany’s DAX gained 1.48%. The UK’s FTSE 100 Index advanced 0.60%.

French and German sovereign bond yields were lower across the curve, falling in sympathy with U.S. Treasury yields after U.S. inflation slowed more than expected. UK gilt yields fell across most of the curve but ticked up at the very front end as economic growth in May surprised to the upside, stoking uncertainty about whether the Bank of England (BoE) would ease monetary policy.

UK economic growth rebounds

UK gross domestic product grew in May, increasing 0.4% sequentially, after stalling in April. The expansion was driven by upticks in services and construction output, particularly infrastructure and homebuilding. On a rolling three-month basis, the economy grew 0.9%, the fastest pace since 2022.

Three BoE policymakers still appear to favor steady rates

Three Bank of England rate-setters indicated that they were still reluctant to vote in favor of lower borrowing costs, prompting markets to scale back bets on a rate cut at the central bank’s August 1 meeting. Chief Economist Huw Pill said the BoE had made “substantial progress” in bringing down inflation but noted that key drivers, such as wage growth and services inflation, were still showing “uncomfortable strength.” Jonathan Haskel and Catherine Mann, both regarded as hawkish on monetary policy, indicated that they would rather hold rates steady until evidence of a sustained drop in services inflation emerged.

Euro area wage tracker signals wage growth is picking up

Wage tracker data from online jobs platform Indeed indicated that the year-over-year increase in salaries for euro area openings listed on its site stood at 4.20% in June, an acceleration from the annual increase of 3.47% recorded in May. T. Rowe Price European economist Tomasz Wieladek said: “If more evidence of persistent wage inflation in forward-looking indicators emerges, the ECB [European Central Bank] may well have to cut at a slower pace than markets expect.” 

French election deadlocked

No party won an outright majority of 289 seats in the second round of the parliamentary election in France, heralding a long period of talks to form a coalition government. The left-wing New Popular Front won 182 seats. President Emmanuel Macron’s Ensemble came in second, with 168. The hard-right National Rally won 143 seats.

Japan

Japanese stocks retreated at the end of the week from the record highs they reached on Thursday amid heightened speculation that the authorities intervened in the foreign exchange markets to support the Japanese yen. 

The speculation was triggered by a surge in the value of the yen against the U.S. dollar and was reinforced by a Nikkei report that the Bank of Japan (BoJ) conducted rate checks with banks on the euro-yen currency cross on Friday after the yen rose. A stronger yen hurts the profit outlook for Japan’s export-focused industries and makes Japanese assets more expensive for foreign investors.

Masato Kanda, the vice minister for international affairs, declined to comment to the media on whether there had been intervention to prop up the yen, but he said recent moves were out of line with fundamentals. Chief Cabinet Secretary Yoshimasa Hayashi said the authorities were ready to take all possible action on exchange rates.

JGB yield eases to two-week low

The yield on 10-year Japanese government bonds (JGBs) eased to around 1.05%, a two-week low, as investors assessed the outlook for monetary policy after the sharp rebound in the yen. Japanese yields also tracked U.S. Treasury yields lower as hopes for a U.S. interest rate cut rose on soft U.S. inflation data. The BoJ has come under pressure to raise rates again in July to defend the currency and narrow the difference between domestic and foreign bond yields. The central bank is expected to unveil its plans for reducing bond purchases this month after reports that it met with market participants this week. 

Machinery orders fall most since November; industry output revised higher

On the economic front, core machinery orders, a leading indicator of capital spending in the coming six to nine months, unexpectedly declined for a second month in May. They fell 3.2% sequentially to JPY 857.8 billion, after dropping 2.9% in April, mainly due to a sharp decrease in the nonmanufacturing sector. Meanwhile, May’s industrial production growth was revised up from an initial estimate of 2.8% to 3.6% amid strong rebounds in the output of motor vehicles, electrical machinery, information and communication electronics equipment, and general-purpose and business-oriented machinery.

China

Chinese stocks gained as strong export data offset concerns about deflationary pressures. The Shanghai Composite Index rose 0.72% while the blue chip CSI 300 added 1.2%. In Hong Kong, the benchmark Hang Seng Index was up 2.77%, according to FactSet. 

Exports exceeded forecasts in June, rising 8.6% from a year earlier, up from 7.6% growth in May. Analysts attributed the strength in overseas demand to manufacturers frontloading shipments ahead of potential tariff hikes from several major trading partners. However, imports unexpectedly shrank 2.3% in June, down from May’s 1.8% gain amid weak domestic demand. The overall trade surplus increased to a multi-decade high of USD 99.05 billion from USD 82.62 billion in May. 

China’s consumer price index rose a lower-than-expected 0.2% in June from a year earlier, narrowing from May’s 0.3% rise. Core inflation, which strips out volatile food and energy costs, rose 0.6%, unchanged from May. The producer price index fell 0.8% from a year ago, marking its 21st month of decline, but eased from a 1.4% drop in May. 

China’s economic recovery has been uneven this year despite numerous measures to spur growth as a protracted property sector slump and weak domestic demand have restrained consumer prices. Many analysts have shifted focus to the Third Plenum on July 15, a three-day meeting of the Chinese Communist Party that is expected to unveil key economic policies for the coming years.

Other Key Markets

Hungary

Slightly dovish inflation data may allow incremental rate cuts 

On Tuesday, the Hungarian government reported that consumer price index inflation in June was measured at a year-over-year rate of 3.7%. This was another lower-than-expected CPI reading, and it was lower than the 4.0% year-over-year rate measured in May. In fact, in month-over-month terms, June was the second consecutive month in which inflation increased 0.0%.

According to T. Rowe Price credit analyst Ivan Morozov, stable food prices are the main reason for lower headline inflation. Core inflation, on the other hand, stayed broadly unchanged at a year-over-year rate of 4.1%, while its month-over-month increase of 0.45% was driven by services costs. Overall, Morozov believes that the data are slightly dovish and could enable policymakers to continue reducing interest rates incrementally in the months ahead.

Czech Republic 

Falling inflation and weak economic activity could enable modest rate cuts 

Elsewhere in central Eastern Europe, the Czech government reported this week that CPI inflation in June was measured at a year-over-year rate of 2.0%. This was notably lower than expectations of 2.4% and lower than the year-over-year reading of 2.6% in May.

According to Morozov, inflation fell by 0.3% in month-over-month terms, pushing three-month inflation momentum close to 0.0%. Also, he notes that the downside surprise was mostly driven by non-core items. Nevertheless, he believes that the combination of lower-than-expected inflation and weak economic activity data could pave the way for the central bank to pursue modest short-term interest rate reductions in the second half of the year.