A hawkish hold ahead?

• Markets in July
• Global market indices
• Currencies
• Fixed Income
• Commodity sector news
• Global Macro Updates
• Key events in August

Markets in July

July saw equities rallying with investors still positive about the slowdown in inflation as Fed Chair Jerome Powell noted in Wednesday’s post-meeting press conference that the Fed’s hikes are working to curb price pressures. Bonds remained relatively range bound. So far, the earnings season has reported robust earnings, lending support to stock market bulls. However, as wage gains hit margins, markets may need to prepare for a weaker Q3. There will also be a global growth slowdown as the IMF’s updated July forecast indicated that the “tightening of monetary policy has brought policy rates into contractionary territory.“ It noted that this is starting to weigh on activity, slowing the growth of credit to the non-financial sector, increasing households’ and firms’ interest payments, and putting pressure on real estate markets.

Despite the Fed’s staff no longer forecasting a US recession, and, according to Powell, "we do have a shot" for inflation to return to target without high levels of job losses, the full tightening of credit conditions including the impact on the housing market are still to be felt. We are seeing persistent inflation exacerbated by continuing wage pressures. The labour market remains tight with initial jobless claims falling for a couple of weeks in July. Although the pace of wage rises is slowing, we still have a shift in consumer spending from goods to services, which means that core services inflation excluding housing is likely to stay elevated due to those wage gains. We are also seeing corporate margins experience a squeeze as wages continue to rise.

The ECB raised rates for the ninth time in a row today by 25 basis points with the Bank of England (BoE) expected to follow next week. The Fed, ECB and BoE are facing a similar challenge: Inflation is coming down due to lower goods prices as supply constraints continue to dissipate, but wages are likely to keep services inflation sticky. Although we are seeing a slowdown in business activity in Europe and the UK, with composite PMIs falling in July, the ECB and the BoE will be under pressure to bring down that sticky core element, even if it means further softening of their respective economies.

Corporate Earnings News

According to Refinitiv I/B/E/S data, as of 26 July 2023, the 23Q2 Y/Y blended earnings growth estimate is -7.1%. If the energy sector is excluded, the growth rate for the index is -1.2%. Of the 152 companies in the S&P 500 that have reported earnings to date for 23Q2, 77.6% reported above analyst expectations. This compares to a long-term average of 66%. The 23Q2 Y/Y blended revenue growth estimate is -0.6%. If the energy sector is excluded, the growth rate for the index is +3.3%.

Global Market Indices

US: 

S&P 500 +2.63% MTD and +18.96% YTD
Nasdaq 100 +2.12% MTD and +41.70% YTD
Dow Jones Industrial Average +2.99% MTD and +6.91% YTD
NYSE Composite +3.42% MTD and +8.13% YTD

Europe:

Stoxx 600 +0.76% MTD and +9.55% YTD
DAX -0.10% MTD and +15.86% YTD
CAC 40 -1.15% MTD and +13.00% YTD
FTSE 100 +1.93% MTD and +3.02% YTD
IBEX 35 +0.08% MTD and +6.67% YTD
FTSE MIB +2.66% MTD and +22.24% YTD

Global:

MSCI World Index +2.83% MTD and +15.99% YTD
Hang Seng +2.37% MTD and -2.10% YTD

Mega cap stocks had a mixed July with Amazon and Microsoft down, Apple relatively flat, and Meta Platforms, Alphabet, Nvidia, and Tesla all up.

Facebook parent Meta Platforms returned to double-digit revenue growth for the first time since the end of 2021 and forecast revenue in the current quarter to be in the range of $32bn-$34.5bn. Revenues in the second quarter rose 11% to $32bn, above analysts’ expectations of an increase to $31.03bn.

Energy stocks had a mixed July, rising on Chinese promises to support the economy and hence demand in the world’s second largest economy and falling on worries over excess supply as US inventories remained higher than previously expected. Apa Corp (US), Phillips 66, Marathon Petroleum, Baker Hughes Company, Occidental Petroleum Corporation, BP, Shell, Chevron, Halliburton were all up, while Energy Fuels and ExxonMobil were down.

Materials and Mining stocks had a mixed July on concerns over global growth and demand. Mining stocks Freeport-McMoRan, Newmont Mining, Nucor Corporation, and Sibanye Stillwater are all up. Materials stocks were mixed with Albemarle Corporation down, while Mosaic, Celanese Corporation, CF Industries Holdings, and Yara International are all up.

Commodities

Oil prices have rallied for four weeks, buoyed by signs of tighter supplies, largely due to output cuts by Saudi Arabia and Russia, as well as Chinese authorities' pledges to provide support to its economy. The market seems to anticipate that Saudi Arabia will roll over its output cuts in September, although other OPEC+ members are less likely to follow.

Gold prices have extended their gains in July helped by a weaker dollar and slightly lower bond yields. Gold is highly sensitive to rising interest rates as they increase the opportunity cost of holding the non-yielding asset, therefore rising expectations that yesterday’s 25 basis point rise by the Fed may be its last in this hiking cycle, may see the prospects for gold improving.

Wheat rallied in July following Russia’s withdrawal from the Ukrainian export deal and its statement that it will assume any vessels travelling to Ukraine to be carrying weapons.

Industrial metals have rallied in July with copper, aluminium, and zinc up due to USD softening and despite concerns over slower Chinese growth and uncertainty over the stimulus from the government there.

Currencies

The dollar was generally down in July due to weaker inflation data, slowing to 3% in June, and rising expectations that the July tightening would be its last this year. The GBP is +1.87% MTD and +6.97% YTD against the USD. After the surprise drop in inflation to 7.9% in June, the Bank of England could be expected to end its tightening cycle sooner than previously predicted, however, with core inflation still at 6.9%, more rate rises are likely. The IMF, in its latest forecast, has now raised its forecast terminal rate for the UK to 5-5.5% and it thinks the Bank of England will need to keep policy tight until the end of 2024, which suggests that the Sterling could continue to outperform. The ECB raised rates by 25 basis points today bringing its deposit rate to 3.75%, its highest level since 2001. In its statement it said, “The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target and will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.” During the press conference following the meeting, ECB President Christine Lagarde made clear that the ECB will not be cutting any time soon. The EUR +1.60% MTD and +3.59 YTD against the USD

Cryptocurrencies

Bitcoin +8.79% MTD and +77.99% YTD
Ethereum +0.53% MTD and +56.51% YTD

With markets timidly risk-on due to expectations that the Fed will stop raising rates after yesterday’s meeting, crypto has managed to hold its ground in July.

Fixed Income

US Treasuries 10 year yield to 3.86%.
German 10 year yield to 2.48%. 
UK 10 year yield to 4.28%. 

US Treasury yields fluctuated within a relatively narrow range in July despite widespread expectations of a 25 basis point rise in July’s meeting. The fluctuation had much to do with the perceived strength of the labour market and what it would mean for the September meeting. With US GDP coming in at 2.4% in Q2, removing the fear of recession for some market players, Treasury yields are likely to fall slightly this year as the market seems to believe that the Fed will remain in a holding pattern for several months as the lagged effects of previous rate rises feed through, and inflation moves closer to target. Markets are also anticipating that the ECB is now at or very near its peak rate, given that growth in the eurozone economy is slowing, while demand for bank loans dropped to its lowest level in Q2, reflecting the impact its prior rate rises are having on the corporate sector.

Note: As of 5:30 pm EDT 26 July 2023

Global Macro Updates

A data dependent Fed. In a unanimous decision, the Federal Open Market Committee lifted the federal funds rate to a new target range of 5.25-5.5% on Wednesday. The rate hike, the Fed's 11th in its last 12 meetings, left the door open to another increase in September. Speaking at the press conference after the decision Fed Chair Jerome Powell said, "It is certainly possible we would raise the funds rate at the September meeting if the data warranted, and I would also say it's possible that we would choose to hold steady at that meeting if that's what the data called.” He noted the Fed will be making its decision on monetary policy on a meeting-by-meeting basis. The committee’s tone was hawkish with the official statement saying that “inflation remained elevated, jobs gains in recent months had been robust” and economic activity was expanding at a moderate pace. Powell said on Wednesday the central bank's staff no longer forecasts a US recession, and "we do have a shot" for inflation to return to target without high levels of job losses. The committee said it remained “highly attentive to inflation risks,” and would continue to assess additional information and its implications for monetary policy.” As noted by the Financial Times, traders are now pricing in an 80 per cent probability that policymakers will keep rates steady at their next meeting in September, according to data compiled by Refinitiv and based on interest rate derivatives prices.

Europe’s recession? In its latest forecast released this week, the IMF said that Germany will suffer a recession this year with GDP falling 0.3%. It cited the lingering impact of the energy crisis. Manufacturing, which has borne the brunt of the energy squeeze, continues to decline due to lower demand from China and tighter monetary policy. The slowdown in the German and wider Eurozone economy continues with the Eurozone Manufacturing PMI falling to 42.7 in July of 2023 from 43.4 in the previous month, the lowest in three years as the sector experienced continued declines in output and new orders. The flash Eurozone Composite PMI fell to 48.9 in July from 49.9 in June, signalling a deterioration in business conditions. Despite the slowdown in growth and headline inflation falling to 5.5%, core inflation remains sticky across the Eurozone. As noted by the ECB when it raised rates by another 25 basis points today, there are a number of existing inflationary risks including another rise in energy and food prices. As noted by ECB President Christine Lagarde in the press conference, inflation still remains too high but ECB actions will remain data dependent.

Crypto in the house. The House Financial Services Committee approved a Republican-led bill in a 35-15 vote. The House Agriculture Committee, led by Pennsylvania Republican Glenn Thompson, will consider its own portion of the bill on Thursday, including $120 million in additional funding for the Commodity Futures Trading Commission, which would get new powers to oversee the asset class under the legislation. According to Coindesk.com, during Wednesday’s markup discussion, some Republicans and Democrats refused to support the proposed market structure bill, criticising a clause in the bill that would allocate more power to the Commodity Futures Trading Commission (CFTC). They also expressed concerns about whether the bill would weaken consumer protections enshrined by the US' decades-old securities laws and ultimately leave US investors with fewer protections against fraud.

As noted by Bloomberg news, even if the house does vote in favour of the bill, it will have difficulty in the Senate as the Banking Chairman there, Sherrod Brown, has been a crypto sceptic. 

Key events in August 

3 August Bank of England Monetary Policy Summary, minutes and Monetary Policy Report. Although inflation fell in June, given that the UK’s labour market is expected to remain tight, with wages continuing to be the biggest driver of inflation, the BoE will likely continue to raise rates until it sees core inflation falling sufficiently, even as mortgage rates rise and concerns about economic growth may hit Sterling and equity markets.

22-24 August 2023 15th BRICS leaders’ summit. South Africa will host the summit in Cape Town under the theme “BRICS and Africa: Partnership for Mutually Accelerated Growth, Sustainable Development and Inclusive Multilateralism”.

24-25 August 2023 G20 trade and investment ministers’ meeting. G20 trade and investment ministers will meet in Jaipur, India. 

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