As we start a new week, let's take a look at the significant events in the global economy over the past week with our weekly financial update, presented by Bas Kooijman, the CEO and Asset Manager of DHF Capital SA.
The US stock market saw modest gains last week, with the S&P 500 and Nasdaq Composite reaching new highs. This growth, however, was narrowly focused, as the S&P 500's capitalization-weighted index outperformed its equally weighted counterpart by 2.15 percentage points. Technology and growth stocks led the charge, driven by ongoing excitement over artificial intelligence, significantly outpacing value stocks by the largest margin since March 2023.
Inflation data provided a boost to growth stocks. The headline Consumer Price Index (CPI) was flat in May for the first time in nearly two years, while core CPI, which excludes food and energy, rose by a modest 0.2%, marking a seven-month low. Year-over-year core inflation decreased to 3.4%, the lowest since April 2021. The Producer Price Index (PPI) also declined by 0.2%, with core PPI falling to 2.3%, ending a five-month streak of increases. Import prices dipped by 0.4%, their first decline in four months.
Despite these positive signs, labor market data raised some concerns. Weekly jobless claims jumped to 242,000, the highest in nearly a year, while continuing claims reached 1.82 million, the third-highest in the past year. This mixed economic picture may explain the Federal Reserve's cautious stance. The Fed left interest rates unchanged but signaled a higher expected federal funds rate for the end of 2024, suggesting only one rate cut later in the year.
US Treasury yields fell sharply, with the 10-year note yield dropping from 4.43% to 4.21%. In the corporate bond market, new issuances were below expectations, and high yield volumes were also lower, influenced by the Fed's actions and inflation data.
European markets experienced a turbulent week, with the pan-European STOXX Europe 600 Index falling by 2.39%. Political uncertainty following the European Parliament elections, where far-right parties performed strongly, impacted investor confidence across major bourses. Italy’s FTSE MIB declined by 5.76%, Germany’s DAX lost 2.99%, and France’s CAC 40 dropped by 6.23%. The UK's FTSE 100 saw a more modest decrease of 1.19%.
Political instability, particularly in France, where President Emmanuel Macron called for snap legislative elections, created a negative sentiment. European Central Bank President Christine Lagarde's comments, which confirmed the continuation of restrictive monetary policy without imminent rate cuts, added to the uncertainty.
Government bond yields reflected this political tension. French and Spanish 10-year yields rose sharply before easing later in the week. In contrast, German bond yields fell, indicating a flight to safety amid the uncertainty in France.
Midweek, weaker-than-expected US consumer price data briefly lifted European equities, as it rekindled hopes for potential US interest rate cuts. However, the positive sentiment was short-lived, as the Fed's comments following their June meeting indicated only one rate cut before the end of 2024.
European macroeconomic data provided a mixed outlook. The Euro area recorded a trade surplus in April, thanks to strong export growth. However, industrial production unexpectedly fell by 0.1%, contrary to the anticipated 2% growth. The UK economy stagnated in April, with service sector growth offset by declines in production and construction.
Asian markets presented a varied performance. In Japan, the Nikkei 225 gained 0.3%, while the broader TOPIX Index slipped by 0.3%. The Bank of Japan (BoJ) kept its monetary policy unchanged and announced plans to release a detailed strategy for tapering Japanese Government Bond (JGB) purchases at its July meeting. The yield on the 10-year JGB fell from 0.98% to 0.93%, and the yen weakened to JPY 157.5 against the USD.
The BoJ's decision to maintain its bond-buying program was viewed as dovish, suggesting a gradual approach to monetary normalization. BoJ Governor Kazuo Ueda hinted at potential interest rate hikes in July, depending on economic data, as the BoJ aims to achieve its 2% inflation target.
Revised GDP data showed Japan's economy contracted by 1.8% annually in Q1, less than initially estimated, due to an upward revision in private inventories. The first quarter's weakness was largely attributed to the impact of an earthquake and suspension of some auto production. Producer prices increased by 2.4% year-on-year in May, surpassing market expectations.
In China, equity markets fell during a holiday-shortened week. The Shanghai Composite Index dropped by 0.61%, while the CSI 300 declined by 0.91%. The Hang Seng Index in Hong Kong fell by 2.31%. Economic data indicated ongoing deflationary pressures, with the consumer price index rising by a mere 0.3% year-on-year in May, unchanged from April. Core inflation slowed to 0.6%, and the producer price index fell by 1.4%.
Tourism data from the Dragon Boat Festival highlighted consumer caution, with tourism revenue increasing by 8.1% from the previous year but still lagging pre-pandemic levels. Weak consumer confidence and a prolonged property sector slump continue to weigh on China’s economic recovery, despite government efforts to stimulate the economy.
These developments highlight the ongoing complexities in the global market landscape, driven by varying economic data and central bank policies across regions.
