Global Economy & Markets, Weekly Roundup 29/07/24
Central bank policy decisions are top of mind amid increasing market volatility
Global equity markets were mixed in the past week (MSCI ACWI: -0.9% wow). The setback for US Technology stocks continued (S&P500 IT: -2.4% wow | -9% since its peak on June 10th).
Alphabet was down by -6.0% wow. Its report for Q2:24, prompted some nervousness, despite somewhat above-consensus headline results, with some investors growing weary of how profound the positive effect of massive investments on AI will eventually prove on the return-on-equity. With Q2:24 reports from Apple, Microsoft, Amazon and Meta being due in the current week, further volatility could be on the cards.
Government bond yields were little changed (UST 10Y: -4 bps to 4.20%), ahead of the trifecta of monetary policy decisions. First, the Fed is expected to likely stand pat on July 31st, with the FFR at a range of 5.25% - 5.5%. Attention will turn to the statement and press conference for potential hints on the intended future course of action, particularly regarding the September 18th meeting.
US real GDP growth accelerated to +2.8% qoq (annualized rate) in Q2:24 following a subdued outcome of +1.4% in Q1:24. Stronger growth has not led to accelerating inflation, with core PCE down to +2.9% qoq (annualized rate) in Q2:24 (June year-over-year: +2.6%), from +3.7% in Q1:24 (March year-over-year: +2.8%). With the economy defying recession concerns and inflation normalizing further, the Fed is expected to proceed with measured interest rate cuts in Autumn.
Euro area growth momentum appears to weaken according to PMIs (down by 0.8 pts to 50.1 in July – a five month low). The softer outcome was driven by manufacturing, particularly in Germany. The composite PMI is consistent with flat qoq real GDP growth in Q3, after an expected +0.2% qoq in Q2:24 and an actual outcome of +0.3% qoq in Q1:24.
That development corroborates the view for another rate cut by the ECB on September 12th following the one back in June. Financial markets, according to overnight index swaps, almost fully price-in -50 bps of cuts cumulatively by end-2024. Attention now turns to July’s CPI inflation, due on July 31st, with a slight deceleration of -0.1 pp being anticipated for the annual growth of both the headline and the core, to +2.4% & +2.8%, respectively.
At the same time, whether the Bank of England will lower, on August 1st, its Bank Rate following twelve months of holding it steady at a post-GFC high of 5.25%, is a close call.
Finally, the Bank of Japan’s meeting on July 31st also gathers attention, with the prospect of an interest rate hike being open (current range of 0% to +0.1%). In addition, the BoJ has cited that a specific plan to reduce its purchases of Japanese Government Bonds (JGB) is to be announced at the upcoming meeting. Note that BoJ holds ¥579 trillion worth of JGBs (97% of GDP).
That amount has been roughly stable since early-2023, implying that the BoJ reinvests the proceeds from maturing securities. A drawdown in purchases would probably lead to a gradual reduction in the outstanding amount of JGB holdings. JGB yields have risen by +45 bps ytd at both the 10-year & 20-year tenors to 1.06% and 1.82%, respectively, while the Yen has appreciated by +5% against the US Dollar since July 10th to $/¥153.5.
Global equity markets were mixed in the past week (MSCI ACWI: -0.9% wow). The setback for US Technology stocks continued (S&P500 IT: -2.4% wow | -9% since its peak on June 10th).
Alphabet was down by -6.0% wow. Its report for Q2:24, prompted some nervousness, despite somewhat above-consensus headline results, with some investors growing weary of how profound the positive effect of massive investments on AI will eventually prove on the return-on-equity. With Q2:24 reports from Apple, Microsoft, Amazon and Meta being due in the current week, further volatility could be on the cards.
Government bond yields were little changed (UST 10Y: -4 bps to 4.20%), ahead of the trifecta of monetary policy decisions. First, the Fed is expected to likely stand pat on July 31st, with the FFR at a range of 5.25% - 5.5%. Attention will turn to the statement and press conference for potential hints on the intended future course of action, particularly regarding the September 18th meeting.
US real GDP growth accelerated to +2.8% qoq (annualized rate) in Q2:24 following a subdued outcome of +1.4% in Q1:24. Stronger growth has not led to accelerating inflation, with core PCE down to +2.9% qoq (annualized rate) in Q2:24 (June year-over-year: +2.6%), from +3.7% in Q1:24 (March year-over-year: +2.8%). With the economy defying recession concerns and inflation normalizing further, the Fed is expected to proceed with measured interest rate cuts in Autumn.
Euro area growth momentum appears to weaken according to PMIs (down by 0.8 pts to 50.1 in July – a five month low). The softer outcome was driven by manufacturing, particularly in Germany. The composite PMI is consistent with flat qoq real GDP growth in Q3, after an expected +0.2% qoq in Q2:24 and an actual outcome of +0.3% qoq in Q1:24.
That development corroborates the view for another rate cut by the ECB on September 12th following the one back in June. Financial markets, according to overnight index swaps, almost fully price-in -50 bps of cuts cumulatively by end-2024. Attention now turns to July’s CPI inflation, due on July 31st, with a slight deceleration of -0.1 pp being anticipated for the annual growth of both the headline and the core, to +2.4% & +2.8%, respectively.
At the same time, whether the Bank of England will lower, on August 1st, its Bank Rate following twelve months of holding it steady at a post-GFC high of 5.25%, is a close call.
Finally, the Bank of Japan’s meeting on July 31st also gathers attention, with the prospect of an interest rate hike being open (current range of 0% to +0.1%). In addition, the BoJ has cited that a specific plan to reduce its purchases of Japanese Government Bonds (JGB) is to be announced at the upcoming meeting. Note that BoJ holds ¥579 trillion worth of JGBs (97% of GDP).
That amount has been roughly stable since early-2023, implying that the BoJ reinvests the proceeds from maturing securities. A drawdown in purchases would probably lead to a gradual reduction in the outstanding amount of JGB holdings. JGB yields have risen by +45 bps ytd at both the 10-year & 20-year tenors to 1.06% and 1.82%, respectively, while the Yen has appreciated by +5% against the US Dollar since July 10th to $/¥153.5.