Jul 15, 2022 3:54:05 PM
Weekly Market Wrap 15/07/2022
US CPI released on Wednesday came in ahead of expectations at a 40-year high, providing further ammunition to the case for the trend of large rate hikes to continue. US retail sales for June increased by more than expected, showing a 1.0% increase, ahead of a 0.8% estimate. Economic growth in China fell heavily in Q2, mainly driven by the significant fall in activity due to Covid-19 lockdowns seen across the country in the last few months. GDP also fell by 2.6% QoQ. Earnings season continued this week, with many companies reporting cautious outlooks for future periods, citing inflation and macro-economic uncertainty as potential future stumbling blocks. A number of US banks have moved to suspend share buybacks in order to retain capital ahead of a potential recession. Italian Prime Minister Mario Draghi offered to resign on Thursday after his government failed to back him in a confidence vote, however Italy’s president rejected the resignation and urged Draghi to reconsider. The contest to become the UK’s next Prime Minister continued this week, as Rishi Sunak gained the most votes in the first two rounds of voting by conservative MPs. The Euro has fallen to part with the US dollar as mentions of a 100 basis point rate hike and drove investors seeking safety towards the dollar.
The S&P 500 is currently ending the week up 1.31% at 3,876 and the NASDAQ is down 3.49% at 11,989. US CPI data released this week reached 9.1% YoY, slightly above the economist’s consensus of 8.8%. This was the largest annual increase seen since 1981 and another US economic data point that urges the Fed to continue on its path of aggressive rate hikes, with a 100 basis point rate hike for the July meeting now priced in by investors, despite two Fed policymakers saying they would lean towards a 75 basis point hike instead. However, core CPI offers some optimism that inflation may have started to peak, with June’s core inflation measure coming in a 5.9%, after peaking at 6.5% in March.
The UK market ended the week flat. Bank of England governor Andrew Bailey said that the central bank will bring down inflation to the 2% target “no ifs or buts”. UK inflation is expected to peak at more than 11% later this year and markets are now pricing in a 50 basis point hike for the BoE August meeting. Five candidates remain in contention to become the new leader of the conservative party with the new leader to be announced in September following a party members vote. Many candidates have pledged tax cuts of various kinds and there will be a series a TV debates in which candidates will get to make their case to become leader and tell the public about their plans for the UK’s cost of living crisis.
The Euro Stoxx 50 gained 0.79% to 3,475, the DAX was up 0.67% at 12,895 whilst the CAC 40 ended 0.93% higher at 5,986. The ECB will meet next week and is widely anticipated to raise rates by 25 basis points. The rate hike is expected to be the first of a series by the ECB, with economists predicting a 50 basis point hike to follow in September. However, many investor feel as though the ECB is still not taking defensive action against inflation quickly enough as a 25 basis point hike would still leave interest rates in Europe negative. Europe’s growth outlook for 2023 was once against reduced, last month’s estimate of 1.8% was reduced to 1.5%. Italy has gained significant political risk, after Prime Minister Draghi attempted to resign due to a party within Italy’s large coalition government failed to back a proposed plan to fight inflation. Draghi later said that the coalition that had backed this government “no longer exists”. The chances of an early election in Italy are very possible, which could cause even further economic uncertainty.
Yields on the US 10-Year Treasury fell to 2.95%, as core inflation for June showed some signs that US inflation may have peaked, which cast doubt over the potential for further large rate hikes.
Brent Crude fell by 5.7% this week to $100 per barrel. However oil rallied on Friday after it was learnt that Saudi Arabia is not expected to increase its oil output.
The Week Ahead
Monday – UK House Price Index
Tuesday – UK Unemployment Rate
Wednesday – UK CPI & China Interest Rate Decision
Thursday – ECB Interest Rate Decision
Friday – UK Retail Sales
*Price changes as of last week’s close unless stated otherwise.