Despite initial corporate earnings figures that prompted some head-scratching, the markets were lifted by the downturn in inflation in the US, which suggests that an end to the cycle of rate hikes by the Federal Reserve may be imminent.

Bond yields headed lower, with those on 10-year US Treasuries pulling back below the 4% mark to 3.82% and those on 10-year German Bunds hitting 2.50%.

In the US, the CPI and PPI numbers pointed to weakening inflation, fanning hopes that the Fed is starting to get on top of inflation and that it will only need to go ahead with one, rather than two more rate hikes over the remainder of the year. The US CPI edged up 0.2% in June, following on from a 0.1% rise in May. Over the last 12 months, the CPI was up 3.0%, its smallest year-on-year increase since March 2021, compared with a 4% rise in the previous month and expectations of a 3.1% uptick.

Core inflation excluding food and energy showed a 0.2% increase after a rise of 0.4% in May. It was up 4.8% year-on-year, compared with a 5.3% rise one month earlier.

The unadjusted June PPI was up 0.1%, with a 2.6% increase excluding food, energy and trade services, after annual rises of 0.9% and 2.8% respectively in May.

In Europe, inflation was stable on the previous month in Germany and France, as had been expected. The HICP was up 6.8% and 5.3% year-on-year respectively. Inflation numbers for the Eurozone are due out on Wednesday and are unlikely to alter expectations about the ECB’s next increase in its benchmark rates.

In China, the latest economic statistics have been disappointing. Even though growth continued in the second quarter, it came in at 6.3%, short of the expected 7.3%. What’s more, retail sales – the main indicator of household consumption – lost further momentum, with a 3.1% increase in June after a 12.7% rise in May. The Chinese economy is slowing, and the 21.3% unemployment rate among young people is a real concern. Nonetheless, industrial production provided some cheer with a 4.4% increase, which was ahead of the consensus forecast. Investors are calling for more stimulus measures by the Chinese government, which have been slow in coming.

Against this backdrop, the markets ended the week on a positive note. The S&P 500 index moved up 2.42%, the tech-heavy Nasdaq rose 3.32% and the Stoxx 600 Europe index gained 2.94%.

This week investors are set to focus on the corporate earnings season both in the US, which the banks kicked off on Friday, and Europe.

Source: Bonhôte

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