Wall Street pushes higher on rate cut hopes
Wall Street experienced another positive week, helped by growing expectations of a September rate cut from the Federal Reserve. Tuesday saw the release of the latest consumer price index data, in which inflation rose 0.2% in July, while year-on-year it advanced 2.7%. Investors breathed a sigh of relief that the tariff impact had yet to notably push up prices, sending equities higher. Both the S&P 500 and tech-heavy Nasdaq Composite closed at record highs on Wednesday. However equities lost momentum following Thursday’s release of the producer price index, which came in a lot hotter-than-expected. While traders see a September rate cut as the most likely outcome, the figure added a degree of uncertainty over the size and pace of further cuts.
Despite the pullback, the S&P 500 ended the week 0.9% higher and the Nasdaq rose 0.8%. The Dow Jones Industrial Average added 1.7% and on Friday it reached a fresh intra-day record and closed out the week just 68 points away from its December closing record. Small caps, which are typically more sensitive to rate moves, outperformed large caps, with the Russell 2000 up around 3%. Treasury yields ended little changed overall, declining on the firming rate cut expectations, but nudged slightly higher after a mixed picture from rising retail sales in July while the University of Michigan’s consumer sentiment index unexpectedly declined.
European indices also benefited from the Fed rate expectations, with the STOXX 600 index rising 1.2%. On Friday it had approached a near five-month high. Earnings reports were under review, while trade sentiment took more of a back seat, helping market sentiment. Furthermore, there was optimism ahead of Vladimir Putin meeting with Donald Trump, potentially paving the way for a Russia-Ukraine ceasefire. Regional indices were also higher for the week, with France’s CAC 40 leading gains, up 2.3%. In contrast, gains for the UK FTSE 100 were more muted, adding 0.5%.
In a holiday-shortened week, Japanese equity markets saw solid gains, supported by a strong corporate earnings season and stronger-than-expected second quarter gross domestic product data. The Nikkei 225 gained 3.7% and reached a new record high. The yen was higher for the week against the US dollar, strengthening after comments from US Treasury Scott Bessent, in which he believes that the Bank of Japan is behind the curb on raising rates. Chinese markets also increased, helped by the announcement that the US would extend its tariff pause on Chinese exports for another 90 days. This gave hope that the two sides may be able to reach a trade agreement. The Shanghai Composite ticked 1.7% higher.
Weekly macro highlights
US CPI holds steady in July
US consumer price index (CPI) inflation was 0.2% month-on-month (MoM) in July, below the 0.3% increase registered in June. In year-on-year (YoY) terms, headline CPI inflation remained at 2.7%, according to data published by the Bureau of Labor Statistics. Core CPI inflation, which excludes food and energy, increased 0.3% on the month. This contributed to a 3.1% YoY increase, slightly above market expectations for a 3.0% print and up from the 2.9% recorded in June. Looking at the CPI sub-components, core services ex-housing inflation increased from 3.0% YoY in June to 3.2% in July. Food prices were flat, with a 0.3% MoM rise in food away from home prices offset by a 0.1% decline in food at home prices. Energy prices fell 1.1% MoM, driven by a 2.2% decrease in gasoline prices. Other price increases included medical care, airline fares, recreation, and used cars and trucks, while lodging away from home and communication prices declined.
Japan’s GDP grows in Q2
Japan’s gross domestic product (GDP) rose by an annualised 1.0% rate in the second quarter, above market expectations for a 0.4% expansion. On a quarter-on-quarter (QoQ) basis, growth was 0.3%, marking the fifth consecutive quarter of expansion after the contraction in the first quarter was revised to growth. Net export resilience was a key driver, contributing 0.3 percentage points to overall QoQ GDP growth. This reflected an increase in both exports and imports, with exports contributing 0.5 percentage points to QoQ GDP growth and imports, which are subtracted from GDP, contributing -0.2 percentage points. Private consumption rose 0.2% QoQ compared to market expectations for a 0.1% increase. Private non-residential investment increased 1.3% QoQ, ahead of the 0.5% gain forecast in a Reuters poll. Partially offsetting the increase in private consumption was a 0.3% QoQ decline in public demand. Government consumption was flat over the quarter, with the decline in public demand therefore reflecting the 0.5% QoQ decrease in public investment.
UK GDP growth slows in Q2
UK gross domestic product (GDP) grew 0.3% quarter-on-quarter (QoQ) in the second quarter according to preliminary estimates published by the Office for National Statistics. The data exceeded market expectations for a 0.1% QoQ increase but represented a slowdown from the 0.7% QoQ GDP growth registered in the first quarter. Growth in the second quarter was supported by 0.4% and 1.2% QoQ increases in services and construction output respectively. Production output fell by 0.3% QoQ, reflecting 6.8% and 0.3% respective declines in utilities and mining output, partly offset by a 0.3% increase in manufacturing output. The second quarter figures reveal an economy reliant on the public sector. On the expenditure side, government consumption rose 1.2% which was led by higher spending in health, public administration, and defence. Gross capital formation increased due to changes in valuables, inventories, and alignment adjustments, though business investment fell 4%. Household spending rose 0.1%, while exports grew 1.6% and imports, which are subtracted from GDP, increased 1.4%.
