What’s going on in financial markets? Which macro themes should you watch? Drawing on our depth and breadth of market and economic expertise, Market Pulse brings you insights on the latest investment themes to help preserve and grow your wealth. 

Market views

• Last week we heard from all the major central banks at the annual ECB conference at Sintra. Collectively the commentary pointed towards further tightening. The toughest comments came from President Lagarde of the ECB. She noted some decline in inflation pressures but said the pass through of some of these pressures is still ongoing and must be tackled going forward. The peak in euro area rates is not upon us yet. In the US, Chair Powell reiterated some of his recent comments but added a more aggressive note saying, ‘I wouldn’t take moving at consecutive meetings off the table’. The prospect of two further rate hikes in the US is alive and well.
• The second quarter has been a good one for equity markets, up just under 6% in euro terms. While some of the move in equity markets was quite sector specific, the AI theme was a big driver in the quarter, the better economic growth data coming from the US was also a factor. The belief in a ‘soft landing’ in the US economy gained traction. Meantime the fixed income markets still fretted about when and where interest rates will peak limited the returns during the quarter.
• The second quarter was much better in equity markets than we expected. The global economy proved more resilient than forecast but this is changing as we end the quarter. The euro area and Chinese economies are now underperforming relative to forecasts and while the US may avoid recession, the growth rate which it is likely to achieve is not very exciting. Our defensive positioning of our investment strategy did not work in the second quarter, but we still believe it is the best strategy to adopt given a more challenging outlook for the global economy in the second half of the year.

Macro views

• The main data release during the week was the euro area flash estimate of inflation. Last month this came in well below expectations, this month just in-line. Headline inflation dropped to a 17-month low of 5.5% year-on-year, but core inflation did increase slightly to 5.4%. It is a relief that the figures were not worse than expected and we could be getting evidence that inflation has peaked in the euro area. However, the level is still very high, and we need to see a faster deceleration to get a change in policy from the ECB.
• Some more bright growth indicators came from the US last week. The main one was a large pickup in consumer sentiment, as measured by The Conference Board. It is now back to levels we last saw in January 2022 before interest rates started rising and headline inflation really started to impact. There was also more good news from the housing market as new home sales jumped over 12% month-on-month. These indicate that consumption in the US should prove robust. If this is combined with ‘sticky inflation’ then interest rates could go higher than expected.
• In China business sentiment surveys (PMIs) were released and the picture is one of fading momentum in the Chinese economy. The main drop was in the Services survey down to a six-month low of 53.2, slightly below consensus expectations of 53.5. The manufacturing index did bounce on the month (up by 0.2) but remained in contraction territory at 49 mainly due to weak external demand. The reopening impulse continues to fade in China and this report tells us the global demand for goods is weak.

Chart of the week: What a difference a month can make

Last week in Market Pulse we wrote about the surprise move from the Bank of England after an unusually strong inflation figure. From the chart above you can see what has happened to interest rate expectations as a result of this. In the space of a month, one year interest rate forecasts have been increased by 1%. Since the middle of May it has risen by 1.75% as inflation surprised on the upside. This is what has made us wary of calling a peak in interest rates anywhere. If inflation starts going in the wrong direction in any region, then interest rate forecasts in that region start rising.

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