Equity markets had another quietish but positive week, with global equities gaining 0.7% in local currency terms and 1.1% in sterling terms. Bonds were down slightly.
This was the fourth week of equity gains, at least in sterling terms, with returns boosted by the pound unwinding part of its marked rise against the dollar earlier in the year. It is back down to $1.34 from an end-June high of $1.37. The retreat has largely been a result of the dollar recovering a bit of its losses and is likely to prove only temporary with US policy leading in time to a renewed decline.
The US as ever was centre stage last week. First off, we had the June inflation data. This showed inflation edging higher as tariffs started to boost prices in some sectors. Headline inflation rose to 2.7% while the more important core rate edged up to 2.9%. Still, there was no big surprise.
Then mid-week, Trump livened things up briefly, asking lawmakers whether he should fire Jerome Powell, the Fed Chair. The resulting wobble in the dollar and US Treasuries, however, proved short-lived as Trump then proceeded to say he was unlikely to do so.
We also had the big US banks kick off the second quarter reporting season. Helped by an upturn in trading revenues, their results beat expectations and painted a reasonably positive picture. Even so, earnings growth for the S&P 500 this quarter is still forecast to slow significantly to 7% from gains of around 15% in the previous two quarters.
Meanwhile Chinese equities, which have lagged recently, were up a strong 4% over the week, helped by news that GDP growth slowed a little less than expected in the second quarter to 5.2%. Growth should slow further later this year as US tariffs will take their toll and the downturn in the property sector remains a drag. But the slowdown should be limited as further policy stimulus measures will no doubt be implemented as the authorities try to hit their growth target for the year of around 5%.
Europe drew up the rear last week with markets down 0.1%. Discouraging comments about prospects of an EU-US trade agreement contributed to the downbeat mood given the US threat of a 30% tariff from 1 August if no deal is reached by then.
Here in the UK, the market was up 0.6% with the FTSE 100 testing the 9000 mark for the first time despite the release of some disappointing inflation numbers. The headline inflation rate increased in June to 3.6% from 3.4% and the core rate to 3.7% from 3.5%. Services remain the main problem area with inflation here unchanged at 4.7%.
Wage growth, however, moderated in May to 5.0% and payroll employment has been contracting slowly in recent months. This weakening in the labour market means the Bank of England looks set to continue cutting rates once a quarter despite the disappointing inflation numbers, with the next 0.25% reduction likely on 7 August.
Lastly, there was Rachel Reeves’s Mansion House speech to the great and the good in the UK financial world. This turned out to be a bit of a damp squib. Although there are moves to reduce the regulatory burden on the financial sector in a bid to boost growth and stimulate investment in UK equities, there was some disappointment over the relatively timid nature of the reforms.
This coming week, the main macro news is on Thursday with July business confidence numbers released for the US, EU and UK and the ECB meeting, although it looks certain to leave rates unchanged at 2.0%.
Rupert Thompson – Chief Economist