The rotation to value and growth continues for the second consecutive week. Can this market rotation continue, where will interest rates go and how is the economy shaping up? Get my take on this and more in this week’s market round-up.
MARKET SOUND BITES
Stocks recorded mixed returns for the second consecutive week, with small-cap and value shares continuing to outpace the large-cap growth stocks that have led the market over much of the year. The S&P sold off on Wednesday by more than 2% for the first time since February 2023, while the Nasdaq suffered its worst loss since October 2022. A 12.33% decline in Tesla and a 5.03% decline in Google following earnings reports contributed heavily to Wednesday’s declines. However, as of Friday at close, analysts were predicting overall earnings for the S&P had risen by 9.8% compared with the same quarter a year ago—up slightly from the 9.7% estimated the previous week.
The week’s economic calendar arguably painted an especially mixed picture of how well consumers and businesses were faring. In housing, 617,000 new homes were sold in June, well below expectations of around 640,000 and the lowest monthly number since last November. On the consumer front, jobless claims fell more than expected, while consumer spending rose at an annualized pace of 2.3% in Q2, more than expected and up from the 1.5% gain in the previous quarter. And on Thursday we saw US GDP grew at an annualized rate of 2.8% in Q2, well above expectations and double the first-quarter pace. However, much of the gain came in the form of inventory building and increased government spending. Another factor in Thursday’s rebound appeared to be the release of its core personal consumption expenditures (PCE) price index, which rose a tick more than expected (0.2%) in June but stayed steady at an annual rate of 2.6%—not too far above the 2.0% target for the Federal Reserve’s preferred inflation gauge. The inflation data appeared to cement expectations for a Fed rate cut at its September meeting. The yield on the benchmark 10-year Treasury notes also ended the week slightly lower.
European equity markets sagged midweek as earnings in the technology and luxury goods sectors weighed on returns. Markets priced in 50 basis points (0.50 percentage point) of interest rate cuts from the European Central Bank (ECB) over the remainder of 2024 for the first time since early June.
The yen strengthened for the third successive week, to around JPY 154.2 against the USD, from a prior JPY 157.45, continuing to hurt the profit outlook for Japanese exporters. The yield on the 10-year Japanese government bond rose to 1.06% from 1.04% at the end of the previous week. Investors looked ahead to the Bank of Japan’s (BoJ’s) July 30–31 monetary policy meeting, speculating whether the central bank would raise interest rates at the same time as it details plans for the tapering of its massive bond purchases. And Japanese CPI rising 2.2% year on year in July, in line with expectations and up from 2.1% in June.
Chinese equities fell after unexpected rate cuts by the central bank failed to instill confidence in the economic outlook. The PBOC cut its medium-term lending facility (MLF) by 20 basis points to 2.3%, its first reduction since August 2023. The string of Chinese rate cuts pointed to Beijing’s growing urgency to support growth after China’s gross domestic product undershot expectations in the second quarter. A lack of significant policy initiatives following the Third Plenum, a once-in-five-year meeting of top officials in the ruling Communist Party, also contributed to bearish sentiment.
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