Last week review:

The weekly percentage declines for the S&P and Nasdaq were the largest since March, with some investors going into profit-taking after a five-month rally, due to economic data, disappointing earnings, and rising Treasury yields to a November 2022 high. Of the 422 companies in the S&P 500 that have reported quarterly earnings up to Friday, 79.1% have topped autonomous expectations, according to Refinitiv data. The benchmark S&P 500 index is up 16.6% this year, driven by an improving economic outlook, optimism over developments in artificial intelligence (AI); and signs that the Federal Reserve is nearing the end of US interest rate hikes. The S&P 500 fell 2.27% this week, its biggest weekly decline since March 10. The S&P 500 trades at about 19.5 times next 12-month earnings estimates, much more = expensive than its long-term average of about 15.6 times, according to Refinitiv Datastream. Fitch downgraded the United States to AA+ from AAA, citing expected fiscal deterioration over the next three years as well as rising government debt. Fitch is the second major agency to cut the country’s rating after Standard & Poor’s in 2011 eliminated the US from its triple-A rating. Several major brokerages said the downgrade should not result in a significant drag on US financial markets, given that the economy is stronger now than it was in 2011. With the market entering August as a seasonally slow month, the Fitch downgrade offers an opportunity for investors to take a break from trading/market activity.

Market participants and policymakers assessed US economic conditions based on macroeconomic data releases in the past week to weigh whether interest rate hikes should continue. As for the US manufacturing data, it appears to have stabilized at a slow but still on an expansionary path in July as new orders gradually improved, while a survey showed factory job openings fell to the lowest level in three years, suggesting that layoffs are accelerating. The crucial labor report, ADP Nonfarm Employment Change (July) showed that private sector employment rose further than expected in July to 324k (versus forecast of 189k); on the other hand Nonfarm Payrolls (July) aka public sector employment came in lower than expected at 187k (versus forecast of 200k), Despite the hotter-than-expected private jobs report, some economists believe that the labor market is already slowing down as an effect of the Federal Reserve’s upward trend in interest rates. In a way, the continued resilience of the labor market may also protect the economy from recession. The Labor Department reported the number of Americans filing new claims for unemployment benefits (Initial Jobless Claims) increased slightly last week, while actual layoffs fell to an 11-month low in July as labor market conditions remained tight. The Unemployment Rate stood at 3.5% (lower than the 3.6% forecast). These US economic data readings also showed US worker productivity rose sharply in the second quarter, while labor costs slowed; thereby fueling further optimism that the taming of inflation seen recently is likely to continue. Nevertheless, some Federal Reserve officials are still concerned that US inflation remains too high from its 2% target and further interest rate hikes are still needed, despite recent readings suggesting price pressures are easing.

From the Europe, Euro Zone Inflation slipped back to 5.3% yoy as expected (vs 5.5% in June), but Core CPI was still at 5.5% yoy, unchanged from the previous month. Market participants took this as a comforting sign for the European Central Bank (ECB) to consider ending its brutal interest rate hiking trend. The Euro Zone also reported 2Q23 GDP which was slightly above expectations at 0.6% yoy, but clearly still weaker than the previous quarter. This was matched by German Retail Sales (June) which despite the slowdown still showed negative growth on both an annual and monthly basis at -1.6% yoy and -0.8% mom. PMI highlights in continental Europe still put the Eurozone on the path of contraction as the S&P Global Composite PMI (July) is still wallowing at 48.6, having not yet managed to move into the 50 boundary area. Slowing Inflation is also being felt at the producer level as the Eurozone PPI (June) is at a deflationary level of -3.4% yoy, and -0.4% mom. All of which explains the worse-than-expected decline in Eurozone business activity in July as the decline in manufacturing was accompanied by a further slowdown in growth in the bloc’s dominant service industries. As for the Bank of England, it just raised interest rates by 25 bps (as expected) to 5.25%, its 14th hike, and warned that borrowing costs are likely to remain high for some time. Speaking of PMIs, France, Germany, Euro Zone, and the UK reported PMIs that weakened further in contractionary territory.

From the Asian continent, South Korea & Japan reported fresher economic conditions than China, although some were still below expectations. Japan’s factory output increased for the first time in 2 months in June, indicating rising confidence among manufacturers on the back of strong demand. Japan’s unemployment rate eased to 2.5%, down slightly from May’s 2.6%, while South Korea released a Trade Balance surplus (in July). South Korea and Japan also successfully reported higher than expected Manufacturing PMI (July) although both still stayed in contraction territory aka below 50 points. On the other hand, Indonesia’s PMI performance was the best for July where it was more expansionary at 53.3, up from June at 52.5; representing the 23rd consecutive month of expansionary growth in manufacturing activity. Indonesia reported an increasingly subdued July Inflation at 3.085 yoy, lower than expected 3.1% and previous month’s 3.52%. Core Inflation also tamed further at 2.43%, lower than the forecast of 2.5% and June’s 2.58%. Meanwhile, China Manufacturing PMI (July) fell for the 4th consecutive month in July, albeit at a slower pace, confirming the need for further policy support (stimulus) to boost domestic demand. In good news, the Caixin Services PMI (July) reported increasingly expansionary growth in China’s services sector at 54.1 (higher than expected & previous month).

This week’s outlook:

All eyes will be on the US this week as inflation data is released on Thursday, August 10th. GDP data from the UK will show how the economy is holding up against continued interest rate hikes. Data from China could show deflation risks in the world’s number two economy. Investors are also closely watching the path of US Treasury yields, which roiled equity markets in recent days by climbing to fresh highs this year. Rising bond yields, seen as one of the world’s safest investments because it is backed by the US government, in a way that can drag down the stock market. Some investors fear that stubborn inflation could force the Fed to keep interest rates at their current high levels for longer than expected. On Friday, the US will release PPI (July) data where core inflation growth at the producer level is expected to come in at 2.3% yoy. Market participants will also monitor the statements of several Fed officials for future monetary policy. The UK will release second quarter GDP data on Friday which is expected to move slightly higher, suggesting that the overall economy remains stagnant. Central bank officials have said that keeping interest rates relatively high over a long period of time is key to cutting inflation, even as the BoE sees the economy will only grow minimally in the coming years. In the Euro Zone, Germany will release industrial production data on Monday. The report is expected to show a decline amid slowing global demand, especially from China. The German economy stagnated in the second quarter of 2023, blowing away forecasts of moderate growth; as weak purchasing power, higher interest rates, and low factory orders all weighed on the Euro Zone’s largest economy.

China will release trade figures on Tuesday followed by July inflation data on Wednesday, which is expected to show a decline in consumer prices, amid concerns over the outlook for the world’s second largest economy. This morning Indonesia will release 2Q23 GDP data which is expected to fall slightly to 4.935 yoy from the previous  quarter’s 5.03%, but quarterly growth is believed to be a stronger 3.72% qoq than 1Q23’s minus 0.92%. Later this week, Indonesian capital market traders/investors will also monitor Consumer Confidence (July).

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