US Energy and Financial Sectors Support Stocks, Fed and ECB May Hike Rates This Week
Last Week Review
Global equities ended last week flat. U.S. equities returned 0.7% with support from sectors, such as energy and financials, that have been lagging this year. Developed ex-U.S. equities fell 0.4% and emerging market equities lost 1.1%. U.S. interest rates ended the week flat to modestly higher, while European government bond yields moved lower, most notably in the U.K.
China’s Economic Recovery Disappoints
China’s second quarter real gross domestic product grew 6.3% year-over-year, below expectations of about 7%. Further, quarter-to-quarter growth decelerated to 0.8% from 2.2% in the prior quarter. Retail sales rose a lighter-than-expected 3.1% and youth unemployment remained high at 21%. Amid economic pressures and limited government appetite for broad-based economic stimulus, there are reports that China may slightly lower its 5% economic growth target. We think any more stimulus would be contained and targeted.
U.K. Core Inflation Lower Than Expected, Japan’s Inflation Slightly Above Estimates
The U.K.’s inflation decelerated to 7.9% year-over-year from 8.7% the previous month. U.K. Gilt yields declined meaningfully and investor expectations for the Bank of England’s peak policy rate, based on futures trading, fell about 0.35%. Japan reported overall inflation of 3.3%, slightly higher than expected and the previous month. Japan’s inflation surpassed U.S. inflation for the first time in eight years.
Russia Opts Out of the Black Sea Grain Deal
The deal protected the delivery of grain exports from Ukraine to the rest of the world. Wheat prices initially rose about 3% but then lost the gain the same day as the deal suspension was mostly expected. However, later in the week wheat prices shot back up over 8% after Russia threatened ships traveling to Ukrainian ports. This was the largest daily move since the war’s start, underscoring ongoing risk of commodity volatility.
U.S. Earnings Above Expectations So Far
Second quarter earnings of S&P 500 Index companies so far (17% reported) have surprised to the upside by 6.6%, while sales have beaten estimates by 1.5%. This puts earnings on pace to fall 7.9% year-over-year on an 0.8% decline in sales. The energy sector is causing a material drag on the comparisons because of particularly strong results last year. Excluding energy, second-quarter earnings are projected to fall about 3% on a 3% gain in sales. Technology stocks last week were weighed down by weaker-than-expected operating margins at Tesla (TSLA) and a disappointing outlook from Netflix (NFLX).
This Week Preview
Fed and European Central Bank Expected to Hike Rates
The Federal Reserve is expected, based on futures trading, to increase its policy rate on Wednesday by 0.25% to a range of 5.25% to 5.5%. On Thursday, the European Central Bank also is expected to announce a 0.25% hike, with investors somewhat divided on if it will hike again thereafter. On Friday, the Bank of Japan may adjust its yield curve control policies. Also on Friday, estimates indicate that the core U.S. Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, could increase 4.2% year-over-year for June, down from a 4.6% rise in May.
U.S., Europe, U.K. and Japan May Report Weak Manufacturing, Expanding Services
The U.S., Europe, U.K. and Japan generally may report weak manufacturing activity and expansion in services, based on Flash Purchasing Managers’ Index data. That said, the gap between manufacturing and services has been narrowing with manufacturing activity showing small improvement and/or services activity slowly retreating from strong levels.
Alphabet and Amazon to Report Earnings
Alphabet (GOOG), Amazon (AMZN), Microsoft (MSFT) and Meta (META) are scheduled to lead the line-up of U.S. companies to report earnings this week. These companies have driven year-to-date gains in the S&P 500 Index. We think investors will watch for announcements related to artificial intelligence.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of July 23, 2023.
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