Investment Viewpoint: constructive start to new quarter

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Markets and macro insights with Bernard Swords, Chief Investment Officer

How have markets performed at the opening of the new quarter?

• The new quarter has seen a constructive start, with risk assets making further progress. World equities were up 1% in euro terms in the quarter’s first week. Benign economic data from the US contributed the most important positive factor; consequently, the US market brought equities higher.

• Defensives were the stronger sectors last week, although IT led once again. In the previous quarter, Defensives lagged relative to broader market performance, so there is probably an element of catch-up in last week’s showing. The improved economic data did not however help the US bond market, as it also dampened expectations of US interest rate cuts. By contrast, the euro area fixed income market delivered a marginally positive return over the course of the week.

What is the outlook for the months ahead?

• Equity markets are ending the week somewhat softer, bringing reminders of obstacles to come, most notably the difficulties in achieving final tariff agreements. In addition, it will be several months before the impact of new tariff rates will become clear. A potentially positive factor is the upcoming result season. If we see continued momentum in the IT sector, this will have a bolstering impact on the wider economy, as it indicates a maintenance of capital spending regardless of tariff policy.

What is the overall picture in the US economy?

• Economic data from the US continued to show a resilient economy. However, each of the data releases carried an implicit warning. The main news was the June jobs report, which showed non-farm employment increasing 147,000 last month as against an expected 110,000. The unemployment rate ticked down to 4.1% against a forecast that it would not significantly change. However, half of the new jobs came from the government sector, so private sector jobs growth remains somewhat subdued.

What further data releases illuminated the economic picture?

• The main business surveys in the US (the ISMs) were released, and both were slightly better than expected. The manufacturing ISM increased from 48.5 to 49.0 in June, almost into expansion territory. The non-Manufacturing ISM moved back into expansion territory, rising to 50.8 in June. However, both surveys contained warning signs.

• In the Manufacturing survey, most of the improvement came from the Prices Paid sub index, while in the non-Manufacturing survey the Employment sub-index fell 3.5 points. The conclusion we would draw is that there is greater momentum in the US economy than has been widely assumed, but that it does face challenges in the coming months.

What were the relevant data points outside the US?

• In the euro area, the inflation report was the main release. Core inflation came in as expected, remaining steady at 2.3% year-on-year and on track to be within target levels by the end of the year. From China, we saw the main sentiment surveys (the PMIs). The official PMIs (more reliant on state owned companies) moved to 3-month highs, although both are still hovering around the 50 level. The Caixin PMIs (more reliant on the private sector) were mixed. The Manufacturing survey was up to 50.4 but the Services index dropped to a nine-month low of 50.6. Like that of the US, China’s economic activity faces challenges but is so far holding up better than expected.

The week ahead: what to watch out for

The main point of interest will be tariffs. This coming Wednesday (July 9th), is the deadline for higher tariffs to come into effect in the US. The minutes of the last FOMC (the interest rate setting committee of the Federal Reserve) meeting will be released. The only data point of note this week is Retail Sales from the euro area.