Week in Review: Bullish US inflation data lifts investor sentiment

Data released Friday morning showed the Personal Consumption Expenditures price index, the US Federal Reserve’s preferred measure of underlying US inflation, slowing to 2.5% from a year ago in June, matching estimates from economists polled by Dow Jones. Core inflation, which excludes food and energy, gained 0.2% for the month and 2.6% on the year, also in line with expectations.

Friday’s report offers some encouraging evidence that inflation is continuing to ease from its four-decade high.  Investors will get more clues about the Fed’s next moves at its policy meeting next week, where the central bank is expected to hold rates steady.

US Gross Domestic Product (GDP) expanded at an annual rate of 2.8% in the second quarter, much more than expected. This reading followed the 1.4% growth recorded in the first quarter and came in above the market expectation of 2%. Consumer spending helped propel the growth number higher, as did contributions from private inventory investment and non-residential fixed investment, according to the first of three estimates the department will provide.

In election news, US Vice President Kamala Harris became the presumptive Democratic presidential nominee this week after President Joe Biden dropped out of the race under pressure on Sunday.

In US earnings news, 41% of the companies in the S&P 500 have reported actual results for Q2 2024 to date. Of these companies, 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 74%, according to data from FactSet. During the upcoming week, 171 S&P 500 companies (including ten Dow 30 components) are scheduled to report results for the second quarter.

For the week, the S&P 500 declined 0.8%, while the Nasdaq lost 2.1%, led by weakness in the Magnificent Seven stocks amid concerns that massive levels of AI-related capex won’t be accretive to the bottom line anytime soon. Investors continued their pivot into cyclical areas of the market with small-cap and value shares continuing to outpace the large-cap growth stocks that have led the market over much of the year.

In contrast, the Dow outperformed, adding 0.8%, and notching its fourth consecutive positive week for the first time since May.

In Europe, the pan-European STOXX Europe 50 Index ended 0.73% higher, while the UK’s FTSE 100 Index rose 1.59%. The gains contrasted with midweek losses as earnings in the technology and luxury goods sectors weighed on returns.

In Asia, the benchmark Nikkei was sharply down on the week, falling by 6.0%. The market weakness was partially driven by a third successive week of yen strength (negative for the profit outlook for Japanese exporters) as well as other weak economic data points.

Chinese equities were also weaker on the week, after unexpected rate cuts by the central bank failed to instil confidence in the economic outlook. The People’s Bank of China said it cut the lending rate for one-year medium term policy loans by 20 basis points to 2.3%, its biggest rate cut since China's economy was slammed by the COVID-19 pandemic in 2020. The move comes in the wake of weak GDP data earlier in the month and after markets were disappointed by the lack of major reforms announced following last week’s Third Plenum of the Communist Party’s central committee.

For the week, the Shanghai Composite Index declined 3.07%, while in Hong Kong, the benchmark Hang Seng Index retreated 2.28%, according to FactSet.

Market Moves in the Week:

South African inflation slowed in June, statistics agency data showed on Wednesday, clearing the path for the central bank to cut rates at its next meeting, economists said. Headline consumer inflation stood at 5.1% year-on-year in June, compared to 5.2% in May, in line with the prediction made by economists polled by Reuters.

Inflation has remained above 5% for 10 consecutive months Statistics South Africa data showed, while the South African Reserve Bank (SARB) prefers it to be at the midpoint of its 3%-6% target band. The slow rate of disinflation has meant the central bank has kept its main lending rate unchanged at 8.25% for more than a year.

In other news, the Gauteng Division of the High Court in Pretoria declared on Wednesday that provisions of the National Health Act requiring doctors to register for a “certificate of need” are unconstitutional.

The legal teams for the applicants argued that the sections of the National Health Act (a different piece of legislation from the National Health Insurance Act) setting out a scheme that would require healthcare practitioners to obtain a certificate of need (CON) violated several constitutional rights, including the right to human dignity; the right to freedom of movement and residence; the right to choose a trade, occupation and profession; the right not to be arbitrarily deprived of property; and the right of access to healthcare. The ruling is seen as a major blow to government’s plans to implement the NHI.

The JSE all share index gained 1.5% for the week with only the resource sector ending the week in the red.

South Africa's 10Y government bond yield continues to strengthen since the outcome of the May 29 vote, with foreign investors being net buyers of the nation’s debt to the tune of R23.4 billion ($1.3 billion) this year — on track for the largest annual inflow since 2019, based on data reported by exchange operator JSE. Inflation and monetary policy are also seen to be moving in the right direction, with this week’s inflation print reinforcing bets for a policy easing cycle to begin in September. These developments coupled with more than 100 days without power cuts has been improving investor sentiment.

On the currency front, the rand gained against the dollar on Friday, trading at 18.29 against the greenback, at the close.

Chart of the Week

The personal consumption expenditures price index increased 0.1% on the month and was up 2.5% from a year ago, in line with Dow Jones estimates, the Commerce Department reported Friday. The year-over-year gain in May was 2.6%, while the monthly measure was unchanged. Fed officials use the PCE measure as their main baseline to gauge inflation, which continues to run above the central bank’s 2% long-range target. This positive inflation news has also lifted investor hopes for more rate cuts this year, with the fed funds futures market pricing in cuts in September, November and December.