Weekly Market News
Highlighs of the week
• S&P 500 Hits Record Highs Amid Narrow Advances
• Mixed Signals from Job Market Data in US
• Fed Chair Powell's Reassuring Remarks Calm Investors
• French Far-Right Leads Parliamentary Elections
• Labor Victory in UK Election
• ECB's Lagarde Adopts Slightly Hawkish Tone
• German and French Manufacturing Weakens
• In Japan Annual Wage Increases Hit 33-Year High
• Chinese Equities Fall Amid Economic Concerns while Housing Market Shows Signs of Recovery
• Inflation in Turkey May Have Peaked
• Polish Central Bank Keeps Interest Rates Steady
Market Update: S&P 500 Hits Record Highs Amid Narrow Advances
The S&P 500 Index continued its climb to record highs last week, although gains were notably narrow. Growth stocks outperformed value stocks by 4.15 percentage points, according to Russell 1000 indexes. In contrast, small- and mid-cap benchmarks saw losses.
The Nasdaq Composite, dominated by technology stocks, ended the week 73.71% above its lows since the market rebound in mid-2022. Meanwhile, the Dow Jones Industrial Average, which focuses more on value stocks, gained only 32.79%. The market experienced lighter trading volumes as the week progressed, partly due to the Independence Day holiday on Thursday.
Lower Interest Rates Boost Growth Stocks
Expectations for lower interest rates, driven by signs of weakening growth and easing inflation, have favored growth stocks by reducing the implied discount on future earnings. On Monday, the Institute for Supply Management (ISM) reported its lowest manufacturing activity reading (48.5) since February, indicating contraction. Another report showed a surprise contraction in construction activity.
Services Sector Faces Unexpected Slump
A significant downturn was observed in the ISM’s services sector activity gauge, which dropped from 53.8 in May to 48.8 in June, marking its lowest level since the early pandemic lockdowns in 2020. High gas prices and elevated restaurant menu prices seem to be affecting consumer behavior. However, S&P Global’s rival survey showed continued expansion in the sector, with a slight increase from 55.1 to 55.3.
Mixed Signals from Job Market Data
The job market data provided mixed signals about the economy’s health. The Labor Department’s JOLTS report showed a slight increase in job openings to 8.14 million in May, up from a revised 7.9 million in April, the lowest level in over three years. ADP’s private sector job growth data fell more than expected, from 160,000 in May to 150,000 in June.
The JOLTS data indicated a loosening labor market, with both quits and hiring returning to pre-pandemic levels. The ratio of unemployed workers per job vacancy decreased to 1.2 from about 2.0 during the peak labor market tightness in 2022.
The official jobs report confirmed a slowdown in job growth, with June gains falling to 206,000, a drop of 12,000 from the previous month but less than expected. An increase in government and health care jobs helped offset weakness in private sector hiring, particularly in hotels, restaurants, and retailers. Employment in temporary help agencies also fell by 49,000 jobs, suggesting potential future weakness.
Cooling Labor Market and Inflation Trends
While June’s employment growth was slightly stronger than expected, revisions for May and April were significantly lower. The unemployment rate increased to 4.1%, and annual wage inflation fell to 3.9%, consistent with the JOLTS quits rate, indicating moderation in wage pressures.
A cooling labor market does not necessarily indicate weakness. Increased labor supply and higher migrant flows contributed to the rising unemployment rate. However, continued increases might prompt the Federal Reserve to consider a rate cut in September if monthly core inflation remains low.
Lower inflation pressures were evident, with ISM data showing slowing input price growth for both services providers and manufacturers. Fed Chair Jerome Powell’s reassuring remarks at a European banking conference also calmed investors. He acknowledged the Fed’s progress in reducing inflation, although it might not reach the 2.0% target until late 2025 or 2026.
Powell’s comments and the economic data contributed to a decline in long-term U.S. Treasury yields over the week, with light trading in the bond market due to the holiday. The investment-grade corporate market saw limited issuance, and there was none in the high-yield segment.
European Markets See Gains Amid Political Developments
The pan-European STOXX Europe 600 Index ended the week 1.01% higher in local currency terms. Political tensions eased somewhat as the far-right in France failed to win an outright majority in the first round of legislative elections on June 30. Meanwhile, the Labour Party won the UK general election on July 4 with a large majority. Key stock indexes also rose, with France’s CAC 40 Index climbing 2.62%, Germany’s DAX gaining 1.32%, and Italy’s FTSE MIB increasing by 2.51%. The UK’s FTSE 100 Index added 0.49%.
Labour Victory in UK; French Political Landscape Shifts
In the UK, Sir Keir Starmer’s Labour Party achieved a decisive victory in the general election, ending 14 years of Conservative rule. Rachel Reeves will become the country’s first female Chancellor of the Exchequer.
In France, Marine Le Pen’s far-right National Rally won the largest share of votes in the first round of the parliamentary election, dealing a blow to President Emmanuel Macron’s Ensemble, which finished third behind the left-wing New Popular Front. The political landscape remains uncertain ahead of the second round of voting.
ECB’s Lagarde Adopts Slightly Hawkish Tone
At the European Central Bank’s (ECB) annual retreat in Portugal, ECB President Christine Lagarde adopted a slightly hawkish stance. She highlighted ongoing uncertainties regarding future inflation, particularly concerning the interplay between profits, wages, and productivity, as well as potential supply-side shocks. Lagarde emphasized the need for more data before concluding that inflation risks have diminished. Minutes from the ECB’s June meeting revealed divisions, with some members opposing the first rate cut since 2019 due to surprising wage growth and persistent inflation.
A final estimate of eurozone inflation showed a year-over-year increase of 2.5% in consumer prices for June. However, a key services component remained high, likely supporting the ECB's cautious approach.
Germany's manufacturing sector weakened further in May, with seasonally adjusted orders falling 1.6% sequentially and industrial production contracting by 2.5%. Similarly, industrial output in France declined by 2.1%. These figures suggest ongoing challenges for the industrial sectors in two of Europe’s largest economies.
Japan
Japan's stock markets saw significant gains last week, with the Nikkei 225 Index climbing 3.36% and the broader TOPIX Index advancing 2.65% in local currency terms. Both indexes reached all-time highs, boosted by the weakening yen, which benefits export-focused industries. However, the yen strengthened slightly later in the week.
The yield on Japan's 10-year sovereign bonds reached about 1.1%, the highest level since 2011, before easing alongside U.S. Treasury yields later in the week.
Annual wage increases also hit a significant milestone. Japan's largest union group reported an average wage increase of 5.1%, the highest in 33 years. While this figure was slightly below the initial estimate of a 5.28% hike, it still indicates strong upward momentum in wages.
Despite these positive developments, consumer spending contracted unexpectedly in May. Household spending fell 1.8% year over year, well below the anticipated 0.1% increase. Month-over-month, spending declined by 0.3% against expectations of a 0.5% rise. The yen's weakness appeared to impact spending, particularly on overseas travel packages. Additionally, rising prices led to a 3.1% drop in food expenditures compared to the previous year.
Japan's GDP for the first quarter was revised lower, showing a 2.9% year-over-year contraction, sharper than the initial estimate of 1.8%. This adjustment was primarily due to corrections in construction orders. The annualized GDP change for the fourth and third quarters of 2023 was also revised downward.
China
Chinese equities fell last week as disappointing manufacturing data reinforced worries about a slowing economy. The Shanghai Composite Index and the blue-chip CSI 300 both posted modest losses. In Hong Kong, the benchmark Hang Seng Index gained 0.46% during the holiday-shortened week, as markets were closed Monday for the Special Administrative Region Establishment Day.
China's manufacturing sector contracted for the second consecutive month in June, with the official manufacturing purchasing managers’ index (PMI) remaining at 49.5, the same as in May. This figure, which missed the 50-mark threshold that separates growth from contraction, indicated declining new orders and exports. The nonmanufacturing PMI, which tracks construction and services activity, fell to 50.5 from 51.1 in May, also below expectations.
Conversely, the private Caixin/S&P Global survey of manufacturing activity slightly improved to 51.8 in June from 51.7 in May, marking its eighth consecutive month of expansion. However, the Caixin services PMI dropped to 51.2 in June from 54 in May, missing forecasts. These mixed PMI readings highlight the uneven performance of China's economy this year amid a prolonged property slump and rising trade tensions impacting the manufacturing sector.
In the real estate sector, the value of new home sales by China’s top 100 developers fell 17% in June compared to the previous year, an improvement from the 34% decline recorded in May. This data has sparked some optimism that China's housing market, now in its fourth year of a downturn, might begin to recover following the government's sweeping rescue package announced in May.
Turkey
Recent data suggests that inflation in Turkey might have reached its peak. The Turkish government reported that the consumer price index (CPI) increased by 1.6% month-over-month in June, which was lower than the expected 2.2%. The monthly pace of both headline and core CPI inflation (which excludes food, energy, alcohol, and tobacco costs) slowed to 2.9% and 2.4%, respectively, from over 4% in March and 3% in May. Year-over-year, the headline CPI moderated to 71.6% in June from 75.4% in May, while core inflation dropped to 71.4% from 75.0%.
Poland
On Wednesday, the Polish central bank concluded its scheduled two-day monetary policy meeting and decided to maintain its key interest rate, the reference rate, at 5.75%. Other interest rates controlled by the central bank were also left unchanged.
In the post-meeting statement, policymakers acknowledged a "gradual economic recovery" despite "weakened" activity in the industry and construction sectors. The labor market remains strong, with low unemployment, but wage growth is still high. Inflation was cited at 2.6% year-over-year in June, slightly up from 2.5% in May.
Policymakers noted that despite the economic recovery, demand and cost pressures in the Polish economy remain relatively low. However, they highlighted that domestic demand is being stimulated by significant wage growth. Looking ahead, they anticipate consumer price growth to increase in the coming quarters, likely surpassing the central bank's inflation target due to rising energy prices.
Given these conditions, the central bank decided to keep interest rates steady, aiming to balance economic recovery with inflation control.