June ends, and with it the first half of a year that has been very good for the stock markets, with the S&P 500 reaching 32 new all-time highs (the latest one on the last day of the semester). Since 1928, there have only been 6 years in which this number has been surpassed.
June was a very calm and positive month. In fact, on the worst day of the month, the S&P 500 only lost 0.31%. This clearly indicates the bullish momentum the indices are experiencing.
What to expect for July?
The first half of the month is seasonally bullish due to the influx of new flows from passive allocations. It is estimated to be around 26 billion dollars.
This traditionally makes the first half of July the two most bullish weeks of the year.
The NASDAQ has been positive for 16 consecutive Julys with an average return of 4.64%, with the best days of the year being July 1 (91.67%), July 2 and 3 (75%), and July 5 (77.78%).
In Wall Street
Taking a macro view of what June has been like on Wall Street, it’s undoubtedly essential to talk about inflation. For two consecutive months now, there have been no upward surprises.
This month, the Fed’s interest rate decision was announced, and they decided to keep rates at 5.25%-5.50%. Most analysts are betting on fewer than two rate cuts for 2024.
This seems like a somewhat subjective move, especially considering that the CPI data was published on the same day, just a few hours before, and Powell confirmed that most members did not change their opinions on the matter.
Inflation Commentary
The inflation data released in June, referring to May, were significantly lower than expected, providing, for the first time this year, data that truly aligns with the hypothesis of rate cuts.
- The overall figure remained unchanged (+0.01%) in May, below the expected increase of 0.1%.
- The YoY figure stood at 3.3%, below the expected 3.4%.
- The core inflation data was well below expectations, with an increase of 0.16%. The expectation was 0.28%
- The YoY increase in core inflation was 3.4%, the lowest in the last three years.
The significant positive data came from the services sector. The SuperCore CPI, which measures services excluding housing, was negative for the month due to a sharp drop in transportation service costs.
However, the year-over-year figure still hovers around 5%.
Reviewing the core Personal Consumption Expenditures (PCE) price index, which is a more significant measure for assessing real inflation trends, it increased by 0.08% in May, bringing the annual figure to 2.56%, the lowest in three years (since April 2021).
This month’s data represents a significant step forward, but similar trends in the coming months are needed to provide greater confidence to the FOMC.
Commentary on Economic Growth
The second quarter has ended, but this June, the final reading of the U.S. GDP data for the first quarter was released.
It ultimately showed economic growth of 1.4%, higher than the 1.3% in the second reading but lower than the 1.6% in the first reading, indicating a clear slowdown compared to previous quarters.
Here is the breakdown:
- Personal consumption accounted for 0.98% of the 1.41% GDP growth, a significant drop from the 1.34% in the second estimate and almost half of the 1.68% consumption in the first estimate.
- Fixed investment added 1.19% to the final result, up from 1.02% in the previous estimate.
- The change in private inventories remained almost unchanged from the previous estimate, at -0.42%, slightly above the -0.45%.
- Net trade (exports minus imports) subtracted only 0.65%, a revision from the -0.89% in the previous estimate. With the dollar rising, this figure is expected to fall in the second quarter.
- Lastly, public consumption achieved a modest increase, rising from 0.23% to 0.31%.
The ISM data for May showed a strong recovery in services, which returned to expansion territory, while manufacturing remained weak. A very positive sign in both datasets was the containment of price pressures, which aligned with the favorable inflation data for the month.
In the coming days, the most recent ISM data will be released, and it would be very positive to see services maintaining their strength without an increase in price pressures.
Commentary on Employment
U.S. inflation clearly stabilized above 3%, making it very challenging to achieve the 2% target in the short term despite positive inflation data.
Therefore, the first rate cut by the Fed is more likely to occur due to clear signs of cooling in employment, which is its other mandate.
Looking at the latest employment data for May (June data will be released this coming week), there were strong nonfarm payroll numbers but an increase in the unemployment rate to 4%.
Employment data is obtained from two surveys: the establishment survey, which provides the nonfarm payroll numbers, and the household survey, which determines the unemployment rate. While the former showed an increase of 272K jobs, the latter indicated a decline of 408K jobs.
Explanation for this:
Powell acknowledged that the payroll measure was distorted. It’s important to understand that job quality is at its lowest, with many new jobs being part-time. Additionally, massive immigration is significantly distorting the data.
A key indicator for tracking employment trends is the weekly unemployment claims data, which in June continued the clear trend seen in May. The initiation of new claims is at the highest levels since September, while continuing claims have reached their highest levels since November 2021.
In Europe
The Eurozone has experienced significant turbulence this month. The European elections on June 9 have shifted attention away from inflation and economic growth data, focusing instead on the political uncertainty that may arise.
The spotlight is particularly on France, the region’s second-largest economy. Across Europe, the right-leaning faction made a significant impact. Macron, who is more centrist, decided to call for legislative elections. Meanwhile, the left-wing faction is joining forces to try to counter the right and sidelining Macron’s party.
This situation significantly increases the chances that one of the more “extreme” factions could come to power. Markets dislike uncertainty, and the 10-year yield spread between France and Germany is at its highest since 2012.
As a result, money is flowing out of France (due to uncertainty) and seeking the safety of German assets.
This political situation has also caused significant declines in stock indices and increased uncertainty in the banking industry. France’s benchmark index, the CAC40, now has a negative year-to-date performance.
Additionally, these events have overshadowed the European Central Bank’s (ECB) first rate cut of this cycle, which was already anticipated by the market due to the ECB’s repeated comments in recent months.
This rate cut has been implemented with Eurozone inflation rates clearly above target and without a clear stabilization of base effects. Only Spain has experienced more than 12 months where base effects of inflation have not had significant impacts, and its rate remains well above 3%. It is estimated that the Eurozone will see a similar situation by September-October.
The next steps for the ECB seem likely to be tied to the actions of the Federal Reserve.
Extra
Despite the very positive inflation data in the United States for the Federal Reserve’s interests, tensions have increased in the bond market. The yields on 10-year U.S. Treasuries ended at 4.40%, lower than the end of May but still showing very high levels.
Other reports have mentioned that the fixed income market is highly interconnected globally. Despite the good inflation news in the U.S., tensions in the Eurozone have increased due to the events in France, and Japanese 10-year yields have surged above 1% again.
Additionally, the Japanese yen is at its lowest level against the dollar since 1986. There were interventions last month, and it is highly likely that there will be more interventions soon.
The Bank of Japan (BOJ) has already announced that it will reduce its QE program in July, and there is also a possibility of a rate hike being considered.
The yen’s weakness is also due to the strong performance of the dollar, which acts as a safe-haven currency. Amid uncertainties and tensions in various regions around the world, the dollar has strengthened, rising 1.18% in June.
Finally, a mention of oil prices: May’s inflation data was very positive, partly due to the drop in WTI crude prices, which rebounded in June.
Oil prices increased by more than 6% in the month, returning to the $82 level. Understanding the reasons behind this rise is complex, but it is partly due to increased supply cuts, higher-than-expected demand forecasts from China, and heightened tensions in the Middle East.
Is this increase a risk for future inflation data? Not for structural inflation, but it can cause MoM volatility reflected in gasoline prices or transportation services.
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