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Weekly Market Update Monday 17th July 2023

Weekly Market Update Monday 17th July 2023

During a week where US inflation data came in lower than anticipated, there was a surge in global equity and fixed income markets as hopes were reignited regarding an eventual end to monetary policy tightening.

In June, US consumer prices experienced a modest increase, marking the smallest annual rise in over two years as inflation continued to subside. However, this decrease may not be sufficient to dissuade the Federal Reserve from resuming interest rate hikes this month. The Consumer Price Index (CPI) saw a 0.2% gain last month, following a slight 0.1% increase in May. The rise in the CPI was primarily driven by shelter expenses, which include rents, accounting for 70% of the overall increase. Additionally, there were upward movements in motor vehicle insurance and gasoline prices, which rose by 1.0%. These gains offset the decline in used car and truck prices. Over the 12-month period ending in June, the CPI advanced by 3.0%, representing the smallest year-on-year increase since March 2021, following a 4.0% rise in May.

As market attention shifts to the second quarter earnings season, top banks such as JPMorgan Chase, Citigroup, and Wells Fargo reported results that largely exceeded Wall Street expectations in terms of both revenue and income. JPMorgan CEO Jamie Dimon also expressed optimism about the economy. Analysts anticipate that US earnings will be around 7% lower than the previous year, and consequently, equity markets may be influenced by significant deviations from these estimates in the upcoming weeks.

As expected, Chinese economic growth notably slowed down in the second quarter, with GDP rising by 0.8% compared to the 2.2% surge witnessed in the previous quarter following the COVID-19 pandemic. Recent activity indicators for June also presented a relatively pessimistic outlook, raising doubts about China’s official growth target of 5% for this year.

In the realm of stock markets, US stocks rallied between 2% and 3%, and European equities closed the week 2.95% higher, marking the largest weekly gain in approximately three-and-a-half months. Despite the UK economy contracting by 0.1% in May after expanding by 0.2% in April (although economists had expected a contraction of 0.4%), the FTSE 100 index in the UK rose by 2.45%. In Asia, Japanese equities remained unchanged over the week, while Chinese equity markets experienced a rally following the announcement of extended support for the struggling property market by Chinese officials. Shanghai stocks rose by 1.29%, and Hong Kong’s benchmark Hang Seng Index gained 5.71%.

The latest inflation data from the US eased concerns about the pace of future interest rate hikes, leading to a reversal in the sharp rise of government bond yields observed in the previous week. The yield on the 10-year US Treasury bond decreased from 4.05% at the close of the previous week to 3.82% on Friday. Likewise, the yield on the 2-year note fell from 4.94% to 4.73%. European government bond yields also declined in response to the cooling US inflation data. Although UK bond yields decreased as well, strong wage data seemed to cushion the drop, with the 10-year Gilt yield finishing the week at 4.45%.

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