31/07 Macro Weekly Report: Central Banks in Europe, America, and Japan Make Their Move, Risk On, Retail Investors Retreat
Weekly Market Summary
Last week’s FOMC interest rate meeting results were largely in line with expectations, with no significant surprises, successfully balancing both hawkish and dovish stances. Recent data continues to show that inflation is declining as the economy recovers, supporting the Fed’s tendency toward a moderate stance. The market generally believes that the interest rate hikes have ended; fears over the Bank of Japan’s unexpected shift were alleviated, leading to a dovish adjustment through Yield Curve Control (YCC); developed country market participants accelerated a “risk-on” approach; supported by a “policy bottom”, the Chinese stock market benefited, with the three major indices each rising over 2% for the week, marking two consecutive weeks of gains.
In terms of industry performance, cyclical stocks showed stronger momentum than defensive stocks, indicating a risk-on state:
Due to both the European and American central banks raising interest rates, major developed country bond yields generally increased last week, with the 10-year U.S. Treasury yield breaking the 4% mark again after the rate hike took effect, slightly falling back on Friday to end at 3.97%, well above the previous week’s closing price of 3.85%.
In the digital currency market, the overall market capitalization slightly declined by 1.1% to $1232 billion (according to Coingecko) last week:
The top 100 cryptocurrencies by market cap had the following 7-day gains:
Top 100 Cryptocurrencies by Market Cap 7-day Decline List：
The Curve vulnerability event that occurred on Sunday led to a massive sell-off of the CRV token.
U.S. stock market investors’ enthusiasm for cryptocurrencies cooled slightly, with GBTC’s discount widening from 26% to 30%, ETHE’s discount from 38% to 41%, and Coinbase’s stock price falling 5.6% throughout the week.
On-chain stablecoins saw a significant outflow for the second consecutive week (-$500 million):
Centralized exchange (CEX) stablecoin balances saw a slight increase of $244 million, the largest in five weeks, but overall, the change in the last five weeks has been minimal.
Weekly Important Economic Events Review
GDP Exceeds Expectations, Investment as the Main Support
The U.S. GDP growth was 2.4% in Q2, better than Q1 and market expectations (1.8%). A detailed view shows:
Actual consumer spending increased by 1.6%, showing a slight cooling in consumption. Commodity spending slowed from a 6.0% growth in the first quarter to 0.7% in the last quarter. The slowdown in consumer spending growth largely reflects a cooling in the purchase of big-ticket items, largely attributed to the fall in car prices. Earlier, Americans had rushed to buy vehicles at the beginning of the year as car dealers were able to replenish inventory. Service spending growth slowed from 3.2% last quarter to 2.1%, driven mainly by utilities, healthcare (outpatient and convalescent homes), financial services, and air travel.
Business fixed investment spending increased by 7.7%, far higher than the 0.6% increase in the first quarter, marking the fastest expansion since the first quarter of 2022.
Construction spending grew by 9.7%, as the long-standing issue of short supply in the secondary housing market continues to boost new construction activity.
The Federal Reserve Raises Interest Rates Again
As expected, the Fed unanimously voted last week to raise the federal funds rate target range to 5.25%-5.5%. The post-meeting statement was almost unchanged, with a tendency to further tighten. Chairman Powell emphasized policy dependence on data, with no decisions made for future meetings. If data supports, another rate hike in September is possible. However, the market widely expects this to be the last action in this rate hike cycle.
Consumption Continues to Show Resilience + Inflation Easing
June’s consumer spending was quite robust, with PCE inflation cooling more than expected.
The U.S. June PCE (Personal Consumption Expenditure) price index fell from 3.8% in May to 3%, in line with expectations, and month-over-month grew 0.2%. The core PCE price index, excluding food and energy (a favored inflation indicator of the Fed), fell from 4.6% in May to 4.1%, slightly below the expected 4.2%; it grew 0.2% month-over-month, with expectations and previous values both at 0.2%. The core inflation slowdown was mainly due to reductions in housing costs, used car prices, and airline ticket prices.
Meanwhile, the U.S. second-quarter labor cost index recorded an annual rate of +1%, slower than the expected 1.10% and previous 1.2%, the slowest in two years, indicating a further cooling of wage growth.
The University of Michigan’s July consumer sentiment index jumped to its highest level since October 2021.
It can be observed that while inflation in the U.S. is slowing down, consumer spending remains robust, and wage growth is also slowing. This naturally enables the market to bet that the Federal Reserve can suppress inflation without causing an economic recession.
Unemployment is decelerating
As of last week, the number of initial unemployment claims adjusted for seasonal factors dropped from 228,000 the previous week to 221,000, the lowest level since February, indicating a continued hot job market.
More U.S. companies reported better-than-expected earnings
Last week, 51% of companies in the S&P 500 index reported Q2 2023 earnings. Of these companies, 80% had EPS higher than expected, above the 77% five-year average and 73% ten-year average. However, the reported earnings were 5.9% higher than expected, below the 5-year average of 8.4% and the 10-year average of 6.4%.
Over the past week, positive income surprises reported by companies in multiple industries (led by non-essential consumer goods, industrial and communication services) have driven overall revenue growth for S&P 500 index companies. Since June 30, positive income surprises reported by index companies in multiple industries (led by non-essential consumer goods and industrial sectors) have grown, partly offset by downgrades in energy sector companies’ revenue expectations.
The Bank of Japan (BOJ) ambiguously exits ultra-loose monetary policy
On Friday, the BOJ’s surprise move caused global market fluctuations, with divisions emerging in the market’s interpretation of whether the BOJ is dovish or hawkish. The yen and Japanese stocks fluctuated significantly, affecting most financial assets.
The BOJ did not directly adjust the target interest rate range in its yield curve control (YCC) policy. However, by adding the phrase “more flexible control” and purchasing a certain amount of 10-year bonds at a 1.0% interest rate in fixed-rate operations, the market believes (but can’t entirely trust) that the new “upper limit” of YCC has become 1%, an interesting and ambiguous policy method that is indeed very Japanese.
However, the BOJ’s median CPI forecast for the fiscal year 2024 has been lowered from 2% in April to 1.9%, below the 2% target interest rate, and the upper limit of bond purchases has been slightly expanded, adding evidence for the dovish side.
In the end, the BOJ’s policy uncertainty was digested, with the USD/JPY rising back to the high point of the day before the policy announcement. The market’s expected turning point for the yen exchange rate did not materialize, and the 10-year Japanese bond yield ended at 0.56%, unable to reach the 1% upper limit. U.S. bond yields, which were once boosted by the BOJ, also gave back some of their gains.
China’s Central Politburo meeting brings “policy floor”
The July meeting of China’s Politburo took a more dovish stance than expected, promising easing in real estate, resolution of local government debt, and support for the capital market, which could be a significant turning point. The market generally expects more specific stimulus measures to boost economic growth.
The meeting acknowledged the challenges faced by economic growth, promising to adopt stronger counter-cyclical measures to boost domestic demand, improve expectations, and prevent risks. Specific measures include:
- Easing on the real estate demand side: relax home purchase restrictions and support improved demand.
- 1. Infrastructure investment growth: accelerate the issuance and use of local government special bonds.
- 2. Continued monetary easing: further reductions in reserve requirements and interest rates, as well as targeted re-lending.
- 3. Consumption incentives: focus on automobiles, electronics, and home appliances.
The meeting also promised to take measures to resolve local government debt risks, support the development of private enterprises and the platform economy, and increase confidence in the capital market.
Overall, the meeting green-lighted more stimulus policies to achieve stable growth goals. It is expected that more policy measures will be rolled out in the next 1–2 months, especially in the real estate and infrastructure sectors.
The current round of growth reveals that assets that are the most pessimistic and most severely damaged are the first to rise, such as real estate and financial related chains. This then turns towards industries with sustainable growth performance, such as commodities and fine-tuned manufacturing sub-categories.
Position and Capital Flow
According to Deutsche Bank’s gauge, stock investors’ positions declined this week, mainly due to discretionary investors reducing holdings, but they are still in a high position area (Z score 0.46, percentile 72%). Positions in commodities such as oil and copper have risen, while U.S. dollar positions have dropped, and bond positions have decreased.
Discretionary investors’ positions fell sharply (from 86th percentile to 71st percentile), while systematic strategy investors’ positions rose (from 72nd percentile to 76th percentile). This aligns with AAII and CNN’s retail sentiment surveys, showing a certain fatigue in retail sentiment, but the good news is that institutional investors’ positions have started to rise again:
Last week, equity funds recorded strong capital inflows ($13.8 billion), benefiting from inflows into the United States ($9.9 billion) and emerging markets ($3.6 billion). Europe saw outflows for the 20th consecutive week (-$1.3 billion), and the UK also experienced small redemptions (-$100 million). By industry, materials ($600 million) and finance ($400 million) saw significant inflows. Technology inflows slowed substantially to $100 million, while non-essential consumer goods (-$400 million), energy (-$300 million), and real estate (-$300 million) saw redemptions. Other industry fund flows were minor.
Bond funds recorded strong capital inflows this week ($11 billion), and money market funds had strong inflows ($40.6 billion).
Deutsche Bank’s View: Robust U.S. data surprises have fueled a rapid rise in stock positions, but these data surprises may have peaked. Data surprises often revert to mean, historically oscillating within a range. U.S. data surprises are now at the top of that range, and historical patterns indicate they will begin to weaken from now on.
Moreover, the U.S. data surprise index has completely diverged from negative data surprises in the rest of the world. Typically, U.S. data surprises are highly correlated with the rest of the world. The current gap has reached a historic high outside of pandemic shocks. How will this gap evolve? It may converge in both directions.
We believe that improvements in data will drive expectations higher, and higher expectations are more likely to lead to disappointment. This logic is reasonable, and it means that positive support for U.S. stock sentiment may weaken. Of course, economic data surprises are just one of many market drivers, and corporate earnings surprises are also a crucial driving force, performing well so far.
Market Sentiment
Although the stock market continues to rise, both the AAII investor survey and the CNN Fear/Greed Index have retreated from their highs, a relatively rare situation historically:
In terms of institutional sentiment, Goldman Sachs’ sentiment indicator remains at a high level, and Bank of America Merrill Lynch’s sentiment indicator is in the neutral zone, with no signs of overheating.
Focus This Week
Employment Rate in July
The market faces its next big test with this Friday’s July non-farm payroll report. Employment growth has been slowly decreasing, but only incrementally, which may not align with the expectations of Federal Reserve officials. The market anticipates that July’s job growth will continue to slow, expecting non-farm employment to increase by 175,000, with the private sector adding 140,000. Additionally, the June JOLTS report and the closely-watched data on job vacancies and resignations will be released this week.
Apple and Amazon Q2 Earnings Reports
This week, Apple and Amazon are the most important highlights in the U.S. stock market, along with chip manufacturers AMD and Qualcomm, payment companies PayPal and Block, rental platform Airbnb, trading platform Robinhood, delivery apps Uber and DoorDash, and pharmaceutical companies Moderna and Pfizer.
Apple’s stock price is one of the few tech stocks that are unaffected by either economic recessions or rising interest rates. Earlier this month, Apple’s stock price soared to an all-time high, becoming the world’s first company to reach a market value of $3 trillion. It’s also worth noting that Apple is one of the few tech companies that hasn’t announced major layoffs.
g platform Robinhood, delivery apps Uber and DoorDash, and pharmaceutical companies Moderna and Pfizer.
Apple’s stock price is one of the few tech stocks that are unaffected by both economic recession and interest rate hikes. Earlier this month, Apple’s stock price soared to an all-time high, becoming the world’s first company with a market value of $3 trillion. Also noteworthy is that Apple is one of the few tech companies that has not announced massive layoffs.
Previously, Google, Meta, and Microsoft announced their financial results for June, with relatively strong performance. Revenue growth and profitability have improved due to cost-cutting measures.
The market’s forecast for Apple this quarter is not overly optimistic, with sales expected to decline for the third consecutive quarter and earnings expected to be flat. So far, Apple has kept any plans related to artificial intelligence (AI) confidential, so details about AI plans may affect market sentiment.
Amazon’s main focus is on web services revenue, which generates most of the company’s profits. Revenue is expected to grow 10% over last year, reaching $21.7 billion. This will be the sixth consecutive quarter of slowed growth, as the market expects this revenue will not accelerate again until the end of 2023. People hope that Amazon can address weak corporate spending through new AI demand, although this may take time. Microsoft is considered ahead of Amazon, and its cloud business has been handling ChatGPT’s workload, but it only made a small contribution to second-quarter growth. Microsoft also warned that it needs to spend money to prepare hardware for AI workloads before reaping returns, and Amazon will be in the same situation — comments about spending and investment will need attention.
China’s Measures to Expand Consumption Announced
The State Information Office will hold a press conference on measures to restore and expand consumption on Monday afternoon. Li Chunlin, Deputy Director of the National Development and Reform Commission, and relevant officials from the Ministry of Industry and Information Technology, Ministry of Commerce, Ministry of Culture and Tourism, and the State Administration for Market Regulation will introduce the measures related to the restoration and expansion of consumption.
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