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Stocks & bonds gain as US rate hikes odds dive
Investors appeared to welcome signs of a slowing economy and fading inflationary pressures. Indeed, disappointing US Macro data (PMIs, initial jobless claims, Housing data, Philly Fed leading indicators) drove US rate hikes expectations lower, pushing bond yields and the dollar downward and main stocks indices higher. The US Treasury 10-year bond yield was down to 2.73% on Friday morning, its lowest level in nearly two months. Within equities, small-cap shares and the Nasdaq outperformed. Consumer discretionary was the best performing sector over the week helped by rebounds in Amazon.com and Tesla. It was also a busy week in terms of Q2 earnings reports; many companies are showing greater resilience in profitability and outlooks than expected. In Europe, the ECB raised interest rates by 50 basis points. This larger-than-expected adjustment was combined with the announcement of a new bond-buying tool called the Transmission Protection Instrument (TPI), which was introduced as a measure against the surge in “Periphery” spreads. European shares rose despite a series of discouraging economic data releases, Italian Prime Minister Mario Draghi resignation and the ECB decision to raise interest rates. Core eurozone bond yields fell due to concerns about the economy. In Asia, China’s stock markets posted mixed returns after Premier Li Keqiang tempered expectations of excessive stimulus and indicated flexibility on China’s annual growth target. In Japan, the BoJ left its monetary policy unchanged. Japan’s stock market gained.
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Most US equities indexes ended the week lower, although the tech-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. The Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. Growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12%) and Alphabet (8.4%). On the macro-economic side, stagflation fears started to rise once again. Indeed, YoY CPI and PPI both accelerated. Meanwhile overall macro surprises disappointed for the fourth week in a row: on Thursday, the Labor Department reported a surprise jump in weekly initial jobless claims to a two-month high of 242,000.