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 S&P 500 Index continued to reach new highs last week, driven primarily by a narrow range of advancing stocks. Growth shares, as measured by the Russell 1000 indexes, outperformed value stocks by 4.15 percentage points. Despite this upward trend, small- and mid-cap benchmarks saw losses. The Nasdaq Composite surged, now 73.71% above its lowest point since mid-2022, while the Dow Jones Industrial Average has gained 32.79% in the same period.
The market's upward trajectory is partly fueled by expectations of lower interest rates, influenced by signs of slowing growth and easing inflation pressures. The Institute for Supply Management (ISM) reported a decline in manufacturing activity, with a reading of 48.5, signaling contraction. Additionally, there was a surprise contraction in construction activity.
The services sector also experienced a sharp downturn. The ISM’s gauge of services activity dropped from 53.8 in May to 48.8 in June. Despite this, S&P Global's rival survey indicated continued expansion. Mixed signals from the labor market added to the economic uncertainty. The JOLTS report showed an increase in job openings to 8.14 million in May, but ADP reported a decline in private sector job growth from 160,000 in May to 150,000 in June.
Blerina Uruçi, Chief U.S. Economist, noted a loosening labor market, with job openings and hiring returning to pre-pandemic levels. The official jobs report showed a slowdown in job growth, with June job gains at 206,000, a slight decrease from May. Government job increases and health care employment helped offset private sector hiring weakness. However, the unemployment rate rose to 4.1%, and annual wage inflation fell to 3.9%.
Federal Reserve Chair Jerome Powell's comments at a European banking conference suggested inflation may not hit the Fed’s 2.0% target until 2025 or 2026, but acknowledged progress in reducing inflation. Long-term U.S. Treasury yields declined over the week, reflecting these economic developments.
European markets experienced a positive week, with the STOXX Europe 600 Index rising by 1.01%. Political tensions eased as the far-right failed to secure a majority in France’s legislative elections, while the Labour Party in the UK won the general election with a significant majority. Major stock indexes across Europe saw gains: France’s CAC 40 Index rose by 2.62%, Germany’s DAX by 1.32%, Italy’s FTSE MIB by 2.51%, and the UK’s FTSE 100 by 0.49%.
In the UK, Labour’s victory ended 14 years of Conservative rule, with Rachel Reeves set to become the first female Chancellor of the Exchequer. In France, Marine Le Pen’s National Rally won the largest share of votes in the first round of the parliamentary election, but did not secure a majority.
European Central Bank (ECB) President Christine Lagarde struck a slightly hawkish tone at the ECB’s annual retreat, emphasizing ongoing inflation uncertainties. Minutes from the ECB’s June meeting revealed some opposition to the rate cut due to higher-than-expected wage growth and persistent inflation.
Eurozone inflation data showed a year-over-year decrease to 2.5% in June, though services inflation remained high, supporting the ECB’s cautious approach. Germany reported weaker-than-expected manufacturing activity, with orders falling by 1.6% and industrial production contracting by 2.5%. France also saw a decline in industrial output, down by 2.1%.
In Asia, Japan’s stock markets performed strongly. The Nikkei 225 Index climbed by 3.36%, and the broader TOPIX Index advanced by 2.65%, both reaching all-time highs. This growth was partly driven by a weakening yen, which benefits export-focused industries. However, the yen did strengthen later in the week. Japan’s 10-year sovereign bond yields hit their highest level since 2011 before easing.
Japan's biggest union group reported a significant wage increase of 5.1%, the largest in over 30 years, though this was slightly below initial estimates. Consumer spending in Japan unexpectedly contracted in May, with household spending down 1.8% year over year. Weak yen and rising prices contributed to this decline.
Japan's GDP for the first quarter was revised lower, showing a 2.9% annual contraction, worse than the initial estimate of 1.8%. This was due to corrections in construction orders, and the GDP estimates for the fourth and third quarters of 2023 were also revised downward.
In China, equities fell due to disappointing manufacturing data, which heightened concerns about economic slowdown. The Shanghai Composite and the CSI 300 both posted losses, while Hong Kong’s Hang Seng Index gained 0.46% during the holiday-shortened week. China's official manufacturing PMI for June was 49.5, indicating contraction for the second consecutive month, while the nonmanufacturing PMI rose slightly to 50.5.
The Caixin/S&P Global survey showed a slight improvement in manufacturing activity but a slowdown in services. The mixed PMI readings reflect ongoing challenges in China's economy, including a property slump and rising trade tensions. New home sales by top developers fell by 17% in June, though this was an improvement from May's 34% decline, offering a glimmer of hope for the housing market following the government's recent rescue package.
In sumary, the U.S. stock market rose on expectations of lower interest rates. European markets gained due to political stability and cautious optimism from the ECB. In Asia, Japan's markets hit all-time highs with support from wage increases and a weaker yen, while China faced challenges with weak manufacturing data and a continued property slump.
