Last week review:
China released another disappointing economic growth data after the previous week they revealed mounting deflationary pressures, in PPI (June) they recorded the sharpest decline since 2015 triggered by both domestic and foreign demand which both weakened; and CPI (June) which also remained flat at 0% YoY which is the slowest growth since 2021. As for the latest Chinese economic data, it showed 2Q23 GDP growth of 0.8% in the second quarter, indeed above the forecast of 0.5%, but the annualized pace at 6.3% missed expectations of 7.3%. From the start of the year, China’s GDP has grown by 5.5% yoy in the two quarters so far; and it looks like they will only set a fairly moderate target of around 5% until the end of the year. Analysts think that the post-COVID economic boom is over and China’s economic situation has lost its momentum. Market players are waiting for the implementation of stimulus measures and loose monetary policy aka further cuts in China’s benchmark interest rate to further stimulate the economy. Lastly, China set its benchmark interest rate to stay at 3.55%.
US corporates began reporting 2Q23 results, which were expected to fall 8.1% (according to Refinitiv data), falling further from the 5.7% decline expected at the beginning of the month. US bank stocks continued their rally and managed to prop the Dow Jones up 2.1% last week; while the S&P500 added 0.7%, and the Nasdaq fell 0.6%. This positive sentiment managed to offset the US Retail Sales (June) report which came in below expectations, with Industrial Production (June) even recording negative growth. The US property sector has not helped much either as the US Building Permits and Housing Starts data in June all showed declines. US Initial Jobless Claims last week unexpectedly dropped to a 2-month low.
Better news came from continental Europe where the UK and Euro Zone managed to report increasingly subdued Inflation growth in June. Retail Sales in the UK for June and the Euro Zone Consumer Confidence Index for July showed improvement with a slowing of the decline. Things like this have more or less made market participants feel that the world might be able to avoid recession this year.
Indonesia reported a Trade Balance (June) surplus that surged unexpectedly to USD3.46bn, more than double the estimate, and much higher than May’s USD440mn; helped by Imports falling more than Exports on a monthly basis; whereas on a yearly basis, June 2023 Exports & Imports both fell -21.18% yoy and -18.35% yoy respectively. Indonesia also reported 2Q23 Foreign Direct Investment (FDI) which grew 14.2% yoy, lower than the previous quarter at 20.2%.
This week’s outlook:
This week will be dominated by a number of central bank meetings, where the Federal Reserve and European Central Bank are expected to raise US & Eurozone interest rates by 25bps each; while Bank Indonesia and Bank of Japan Board of Governors Meetings will keep their benchmark rates at 5.75% and -0.1% respectively. Regarding US interest rates, some investors are of the view that this will be the last hike since the Federal Reserve raised the Fed Funds Rate by 500bps since March 2022, the beginning of 40 years of tight monetary policy to combat inflation. Market participants will also be watching the ECB’s plans and ECB President Christine Lagarde’s comments for September on whether there will be another rate hike or a chance for a pause. Inflation in the Eurozone has cooled since hitting a high of 10.6% in December but is still above the 2% Target of the ECB. The ECB itself has started this rate hiking path since July 2022 by 400bps.
Meanwhile, the Bank of Japan will set its interest rates on Friday amid speculation about whether policymakers will be able to adjust its extra-loose monetary policy as inflationary pressures begin to kick in. Data on Friday suggested that Japan’s Core Inflation for June remained above the central bank’s target of 2% for the 15th consecutive month but that price pressures are thought to have peaked.
Investors should reassess whether there is still positive sentiment to support a rally in stocks. Analysts expect that there will be only limited upside potential for US stocks whose valuations are already high; even the S&P500 is now trading at a forward P/E of 19.7x. US Consumer Confidence (July) is likely to play a role as its level is expected to rise to 113 from 109.7 the previous month, which could indicate increased market optimism. Building Permits, Pending Home Sales, as well as New Home Sales (June) will give clues on the further health of the US property sector. US Core Durable Goods Orders (June) and Initial Jobless Claims on Thursday, as well as the Core PCE Price Index (june) will be the last data of the week to guide the future direction of US monetary policy.
World crude oil prices rose nearly 2% last Friday, capping off a winning week for the fourth consecutive week; helped by the potential for lower inventories in the coming months due to planned production cuts by OPEC+; as well as rising tensions between Russia & Ukraine that will also interfere with supply activities.
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