Following a challenging start to the year, various markets worldwide have experienced high inflation rates, which have led to higher interest and policy rates during July 2023.
Further evidence of moderating pricing pressure provided encouragement over the month, even as economic momentum and labour market data presented a more nuanced picture for different regions. The United States (US) released a preliminary second-quarter gross domestic product (GDP) figure of 2,4%, spurring the reintroduction of a 'soft landing' narrative, while quarterly economic growth for the Eurozone came in at 0,3%. China recorded economic growth of 0,8% for the second quarter, confirming its waning economic recovery. Trade data from China also provided some read-through for global demand, with a meaningful decline in exports (-12,4% yoy) signalling weak demand for global goods, while lower imports echoed modest domestic demand. China’s Politburo meeting outlined a focus on policy easing and targeted support for the property and private sector rather than the broad mega stimulus that markets have been used to historically. Nonetheless, the dovish tone and focus on improving consumer demand boosted sentiment.
Commodity prices rose over the month as markets priced for a more benign growth outcome. Against this resilient demand backdrop, tighter supply in energy markets saw the oil price rise by 14,2% over the month. In line with earlier announcements, Opec+ producers cut production in July, while a drop in US inventories and unexpected outages in Nigeria and Libya added to tighter supply conditions.
Russia withdrew from the Black Sea Grain Initiative, which ensured safe trade via this route. Grain prices have already increased, although remaining contained relative to the fallout when the war started. Global food inflation has started to moderate; however, El Niño conditions and further escalations in geopolitical tensions pose a risk to the downward trajectory.
US headline inflation eased to 3,0% yoy in June from 4,0% the prior month. Core inflation also moderated to 4,8%, albeit still at elevated levels. Data for the US personal consumption expenditure price index (PCE) slowed to 3,0%, with the annual rate for core PCE (the Federal Reserve’s (US Fed) preferred measure of inflation), printing at 4,1%. Higher up in the supply chain, producer price gauges also moderated, printing lower than expected. Labour market data for June showed early but somewhat conflicting signs of a cooling labour market. Volatility reigned as markets digested weaker jobs growth figures alongside modestly higher earnings growth and an unemployment rate that declined to 3,6%. The US Fed increased interest rates by 25 bps in July, a well-broadcast change. Accompanying statements emphasised a high level of data dependence and left the door open for further action if required.
Unemployment across several countries in Europe reached historic lows, even as economic data in the region remains weak. The European Central Bank (ECB) increased policy rates by 25 bps. The Bank of Japan announced 'greater flexibility' in its monetary policy, essentially allowing larger deviation from its 10-year yield target of 0%, to 1,0% from the current cap of 0,5%. This will allow long-term interest rates to rise further. Policymakers in Chile reduced interest rates by 100 bps, a move more meaningful than anticipated. Emerging markets responded much earlier to rising inflation and, as such, are further along the interest rate cycle, but time will tell how easy it will be to pursue meaningful interest rate cuts. Developed markets are still hawkish.
Equity markets saw upside in July, with a strong performance from the energy sector and emerging markets. The S&P 500 gained 3,2% with greater market breadth after a reasonable results season, while the Nasdaq 100 gained 3,8%. Emerging markets benefited from a weaker US dollar and greater risk appetite. The MSCI Emerging Markets index gained 6,3% over the month, while the Hang Seng increased by 7,7%.
Declining inflation prints set the scene for a reprieve for bond markets. The Bloomberg Global Aggregate Bond index gained 0,7% In July, leaving the index up by 2,1% year to date. With US policymakers perceived to be less hawkish than counterparts across the pond, the US dollar depreciated by 1,0% on a trade-weighted basis in July, leaving the greenback weaker by 1,6% year to date.
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