César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
Seeking guidance
Last week saw a softer-than-expected US consumer price index reading that gave stocks and bonds a boost on hopes the Federal Reserve will soon end its interest rate hikes. The dollar slumped. Headline CPI slowed to 3.0% in June, the smallest year-on-year increase since March 2021 and down from 4.0% in May. Core CPI, which excludes volatile food and energy prices, slowed to 4.8% on the year from 5.3%. An 8% month-on-month drop in air fares and falling used car prices in June highlighted the easing cost pressures. Producer prices rose just 0.1% year-on-year in June. Still, given a tight labour market and the fact that CPI is still running above the Fed’s 2% target rate, a 25 bps rate hike at the Fed’s July 25-26 meeting is still very likely. In evidence of the US economy’s enduring health, the University of Michigan’s consumer sentiment survey rose in July to the highest level since September 2021, and surpassed expectations. Online sales surged last week thanks to promotions. We will be watching US retail sales this week. The Michigan survey’s one-year inflation expectations edged up to 3.4% from 3.3% in June. Market attention will now turn to Q2 earnings season, which gains momentum this week, and the guidance companies offer. Initial results from banks showed they reaped bumper Q2 profits. We are underweight equities and prefer European and Japanese companies through active managers.
In China, consumer price inflation slowed to 0% in June from 0.2% in May. Producer prices dropped, falling 5.4% from a year earlier after a 4.6% drop in the previous month. The decline in PPI is an indication of a squeeze in profits for industrial companies. Weaker data from China prompted the People’s Bank of China (PBoC) to announce further measures to support the economy. We expect targeted stimulus measures, but they may disappoint the market. China’s credit data is showing signs of improvement, with new bank loans jumping more than expected in June from the previous month. Chinese gross domestic product growth slowed to 0.8% on the quarter in Q2 from 2.2% in Q1.
In markets, the S&P 500 rose 2.4%1 (in USD) last week and bond yield declined on the softer inflation data. US small caps rebounded more than the S&P 500 as they are more leveraged than large companies. The dollar was hit by the lower CPI as markets now anticipate a less hawkish Fed. The euro rose to USD 1.12, a gain of 2.4% on the week. A rebalancing of the Nasdaq-100 could bring some short-term volatility. Oil prices rose in response to supply cuts from Saudi Arabia. On the geopolitics front, Turkey backed Sweden joining NATO. Rounding out the week, Spain’s Carlos Alcaraz won Wimbledon in a dramatic five set thriller.
