Last week saw a notable rally in U.S. stocks, with a particularly strong performance from small-cap stocks. The Russell 2000 Index surged by 6%, marking its best week since early November. Major indexes such as the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite also reached record intraday highs. Value stocks outperformed growth stocks, according to various Russell indexes. However, trading volumes remained light due to the summer vacation season and anticipation of major earnings reports.
The unofficial start of the earnings season began on Friday with second-quarter earnings from JPMorgan Chase, Wells Fargo, and Citigroup. Despite the excitement, all three stocks fell at the opening, with JPMorgan and Wells Fargo missing estimates and the latter lowering its outlook. Analysts expect S&P 500 earnings growth to accelerate from 5.9% in the first quarter to 9.3% in the second quarter, potentially the fastest rate since early 2022.
A significant factor buoying many stocks was the Labor Department's report on the consumer price index (CPI). Headline prices fell by 0.1% in June, the first decline since May 2020. Core prices, excluding food and energy, rose by just 0.1%, the slowest pace in over three years. Chicago Fed President Austan Goolsbee hailed the data as "profoundly encouraging," suggesting inflation is returning to the Fed's 2% target. Despite this, market reactions were mixed. The Russell 2000 outperformed the S&P 500 by 209 basis points and the Nasdaq Composite by 581 basis points. Notably, it was only the second time since 1979 that the Russell 2000 rose by over 3% while the S&P 500 fell, a phenomenon not seen since October 2008.
The producer price index (PPI) data added complexity to the inflation narrative. The headline PPI rose slightly more than expected at 0.2% in June, while May's decline was revised to flat. The core PPI, excluding food, energy, and trade services, remained unchanged. These trends suggest that while inflation pressures persist, they are unevenly distributed.
T. Rowe Price Chief U.S. Economist Blerina Uruçi noted that the resilience of the economy might lead the Federal Reserve to maintain higher interest rates for longer. Current market pricing anticipates more than two rate cuts by December 2024 and almost seven by December 2025, a view Uruçi finds aggressive given persistent inflation in key areas like food and services. European stocks had a positive week, buoyed by lower-than-expected U.S. inflation data. The pan-European STOXX Europe 600 Index rose by 1.45%. Major indexes such as France’s CAC 40, Italy’s FTSE MIB, and Germany’s DAX also saw gains. UK’s FTSE 100 Index increased by 0.60%.
The UK economy grew by 0.4% in May, driven by increases in services and construction output. This marks a rebound from April's stagnation and represents the fastest growth rate since 2022 over a rolling three-month period. Despite this growth, three Bank of England policymakers remain hesitant to lower borrowing costs. Chief Economist Huw Pill highlighted "substantial progress" in reducing inflation but noted persistent wage and services inflation. Policymakers Jonathan Haskel and Catherine Mann, known for their hawkish stances, prefer to hold rates steady until a clear drop in services inflation is evident.
Data from Indeed, an online jobs platform, indicated that wage growth in the euro area accelerated in June, with salaries rising by 4.20% year-over-year compared to 3.47% in May. T. Rowe Price European economist Tomasz Wieladek suggested that if this trend continues, the European Central Bank (ECB) may need to cut rates more slowly than markets anticipate.
Japanese stocks retreated from record highs amid speculation of government intervention in the foreign exchange markets to support the yen. The yen's surge against the U.S. dollar triggered this speculation, with reports suggesting the Bank of Japan conducted rate checks with banks on the euro-yen currency cross. A stronger yen impacts Japan’s export-focused industries and makes Japanese assets more expensive for foreign investors. The yield on 10-year Japanese government bonds (JGBs) fell to a two-week low of around 1.05% as investors evaluated the outlook for monetary policy.
Economic data showed a decline in core machinery orders, a key indicator of future capital spending. Orders fell by 3.2% in May, following a 2.9% drop in April, primarily due to reduced demand in the nonmanufacturing sector. Conversely, May’s industrial production growth was revised up to 3.6% from an initial estimate of 2.8%, driven by strong outputs in various machinery sectors. Chinese stocks experienced gains, with the Shanghai Composite Index rising by 0.72% and the CSI 300 increasing by 1.2%. Strong export data alleviated concerns about deflationary pressures, with exports growing by 8.6% in June compared to 7.6% in May. This growth was attributed to manufacturers accelerating shipments ahead of potential tariff increases from major trading partners. However, imports fell by 2.3% in June, highlighting weak domestic demand. Despite this, the overall trade surplus reached a multi-decade high of USD 99.05 billion. Inflation data showed a minimal increase in consumer prices and a continued decline in producer prices, reflecting ongoing economic challenges.
Last week's market summary highlights a significant rally in U.S. stocks, led by small-cap gains and supported by favorable inflation data, while European stocks benefitted from similar inflation trends, and Asian markets experienced mixed movements due to currency interventions and varying economic indicators.
